HMRC is going into a number of fashion businesses seeking to challenge the status of certain individuals ostensibly engaged on a self-employed basis.
Arguably this should not be a surprise. Employment status is changing with the rise of the gig economy, public finances are under ever mounting strain, and the tax revenues have to come from somewhere. With apologies to Jack Nicholson, Something's Gotta Give.
In this respect freelancers within fashion businesses present a relatively low hanging fruit to HMRC.
HMRC argue that, in practice, the relationship between the fashion business and the individual is such as to indicate an employment relationship.
HMRC then seek to recover from the fashion business the income tax and employee national insurance contributions (NICs) which they argue should have been withheld by the fashion business under the Pay As You Earn (PAYE) scheme from the amounts paid to the individual, and paid over to HMRC. They also look to the fashion business to pay over related employer national insurance contributions, together with associated interest and penalties. This can significantly increase the costs of remunerating the individual even where it is possible to recover the income tax and employee NICs from them (and in many cases such recovery is not possible).
Not only that, but in certain circumstances, where the individual concerned has been VAT registered and has charged the fashion business additional amounts in respect of VAT for the services provided.
HMRC have also sought to argue that the fashion business is unable to reclaim the putative VAT paid (or is required to repay any such VAT amounts already reclaimed). This is on the basis that the individual, as an employee, is not a “taxable person” for VAT purposes and therefore their activities are outside the scope of VAT. As such, any amounts in respect of VAT have been incorrectly charged and cannot legitimately be reclaimed by the fashion business as input VAT. Often it is not possible, or practicable, for the fashion business to seek to recover these amounts from the individual involved and they are simply left out of pocket.
In order to mitigate the risks of such an HMRC challenge, a fashion business should:
Take steps to clarify the basis upon which an individual is being taken on. Do the circumstances really justify self-employment status?
Put in place appropriate documentation which accurately reflects the situation. Contractual documentation which does not bear any resemblance to the actual relationship between the fashion business and the individual will be ignored!
Re-assess the position on a regular basis as the relationship extends and evolves. An individual may initially have self-employed status, but this can change as the individual remains with, and becomes more integral to, the business.
Obtain contractual protections to maximise chances of being able to recover any income tax, employee NICs (and irrespective of recent developments concerning NICs!) or VAT amounts from the individual (though noting that this may still be difficult in practice)
Seek appropriate advice as soon as HMRC indicate that they are commencing an audit or investigation. Being able to respond in a timely and organised fashion to HMRC’s initial queries, and pre-empt the questions they might raise, can prevent an HMRC enquiry or visit taking an unwanted direction.
By Fox Williams' Partner Emma Bailey
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.