May 20, 2016
Payroll errors cost UK employers millions
It is critical that HR understands the difference between self employed workers and those who should be classed as employees. It is also critical that HR ensures people working in their organisation are correctly paid as either PAYE or self employed, as dictated by HMRC. This may sound obvious but a lot of organisations are falling foul of the law regarding payroll compliance and are paying the penalty.
Payroll errors cost UK employers more than £700 million in the last financial year alone, according to research from the accountancy firm UHY Hacker Young. Underpaid tax related to people wrongly declared as self employed was often behind the errors.
Should HMRC deem that a person has been incorrectly classified as self employed, when they should have been treated as PAYE, the host organisation becomes liable for national insurance payments. And in some instances, organisations then incur higher tax charges that would have been the case if the person or persons concerned had been declared as employees from the outset.
SMEs are more likely to slip up regarding employment status, according to UHY Hacker Young. This is largely because they often do not have the necessary expertise inhouse and are unwilling or unable to afford to pay for external support.
Whether or not someone should be PAYE is nowhere near as black and white as people might suppose. In fact, it is often grey. But where HMRC is concerned, if there is any doubt whether a person should be PAYE or not, HMRC usually plumps for employment status.
What can and should HR professionals do to ensure employer compliance is met? First and foremost, HR must be rigorous in its approach. If an individual says their status is self-employed, don’t just take their word for it. Make sure you are satisfied that they meet the criteria. It isn’t always easy to establish what a person’s status is, but it is so important that HR gets it right.
These days, it can be seemingly minor things that in HMRC’s eyes, tip individuals into the PAYE camp. It could be a person having a pass to the canteen or using the organisation’s equipment rather than their own.
HR needs to be aware of the extent of the relationship between the organisation and any self employed individuals. There are three words that are very important here: control, substitution and right of refusal.
Control. Does your organisation have control over the person or persons concerned, in terms of deciding where and when they work? Is it decided which projects they will work on?
Substitution. If someone else cannot be substituted to do a self-employed person’s work, then HMRC may say they are effectively an employee.
Right of refusal. A self employed person has the right to refuse work (unlike employees who have a ‘mutuality of obligation’ with employers). If they are not allowed to exercise that right to refuse work, then should they be PAYE?
HMRC also looks at factors such as whether or not a contractor owns or rents separate business premises and has advertised their services in the previous year. HR needs to be mindful of all these implications if it is to meet HMRC’s increasingly strict criteria.
Perhaps the most important question that HR can ask itself of a person who says they are self employed is this: ‘Do they behave like an employee and are they treated as an employee?’ If the answer is yes, then HMRC would probably come to the same conclusion.