In doing so, HMRC aims to raise additional funds in the form of income tax and National Insurance contributions, by insisting that the sub-contractors take on employed status and pay income tax and National Insurance contributions at source. The new Construction Industry Scheme (CIS) which comes into effect in April 2007 will increase the focus of status enquiries for the construction industry.

Qdos taxation specialist Keith Preece said: “We are increasingly being called in to defend businesses which find themselves under investigation, despite an exemplary tax record.

“It is becoming ever more likely that any business that engages workers on a self-employed basis will be selected by HMRC for a status review, and that HMRC will employ a growing range of tactics to achieve their goal. In recent months we have seen many building contractors face reviews. Logistics firms, taxi businesses, exhibition contractors and any firm that uses sub-contract workers to help it through peaks in workload could be affected.

“The potential financial cost to firms that find themselves presented with a large additional bill is only part of the story. The stress, and the cost of preparing a case for firms without tax enquiry insurance, all add to the strain. However, businesses should realise that they can fight back and challenge HMRC’s decisions.”

Delivery drivers
In one such case Qdos defended a parcel delivery firm based in Leicester, which has a team of employed workers and also engages a small number of freelance delivery drivers, who work on a casual basis and have other sources of self-employed income. They have no contracts, no set hours, and are paid only for the number of hours they work.

Keith Preece said: “Many business people are not aware that it is not possible to just decide, or agree with the worker, that a worker is either an employee or self-employed. Employment status is based upon a complex history of legal precedent, and there are no straightforward rules laid down by Parliament. It is this lack of clarity that enables HMRC to make a challenge.”

In this case HMRC made it clear from the outset that they believed the casual drivers to be employees, and issued demands for PAYE income tax and National Insurance contributions from the delivery company as deemed employer.

Qdos Consulting launched an appeal against this decision and examined the facts of HMRC’s case, much of which was based on third party information, possibly from a disgruntled employee, and much of which presented a completely false picture of the sub-contractors’ working day, specifically claiming that they were required to clock in and out, and to wear company clothing.

Keith said: “Our first job was to reassure the clients that HMRC cannot simply manipulate the tax system by imposing falsehoods upon taxpayers.”

HMRC’s contentions were refuted in detail, although HMRC claimed confidentiality to avoid divulging the source of their information.

Qdos pointed out that if the matter were to go to an appeal hearing before an independent tribunal, the identity of the informant, and a copy of the informant's evidence, would have to be provided to the appellant.

HMRC backed down, stating that the informant wanted to preserve their anonymity, and that the status decision would be revised, to be based solely upon the evidence provided by the would-be employer.

HMRC’s revised decision was that the workers in question were genuinely self-employed, a decision that meant the demands for income tax and NI contributions were withdrawn.

Keith Preece said: “Businesses that find themselves faced with an investigation should take heart from this experience. Employment status is a complex area and decisions should be based upon a thorough understanding of the facts, rather than a cursory review or first impressions.

“Neither businesses nor individual workers have to accept the taxman's attempts to bully them into agreeing to a status decision that is unfair or misinformed. With the appropriate professional guidance, it is possible to stand up to HMRC - and win.”

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Susie Hughes
The Editor © Hardhatter 2007