Being self-employed means that you aren’t entitled to any statutory rights such as the National Minimum Wage, holiday, sick pay etc. With that in mind, why would anyone want to falsely claim that they’re self-employed? Simple; some workers use their self-employed status to avoid employment taxes, and to be paid 100% gross without any deductions being made from their income.
How businesses are avoiding employment taxes
It’s not just workers who are falsely claiming they’re self-employed either, more often it is businesses that are deliberately engaging their workforce in this way.
The main reason is so that they can specifically avoid paying employers NICs on top of the workers’ wages. And at 13.8% employers NICs is a significant additional cost, so the potential to save this can be tempting.
At the further end of the scale, some businesses falsely claim their workers are self-employed to specifically take advantage of the lack of rights that the truly self-employed have.
This means that the business does not have to provide any workers’ rights whatsoever, meaning that the falsely self-employed person has no right to NMW, no holiday, no sick leave, no pension etc.
Businesses make significant savings on their overheads through the combination of avoiding paying employers NICs and by not providing minimum rights to their workers.
In the context of employment agencies and intermediaries, these savings might enable the business to undercut their competitors and win work, however the individual worker is disadvantaged by not receiving any rights.
Sometimes the end-client (that the worker is working for) will be completely unaware that this practice is taking place within their supply chain.
Not only does false self-employment hit the Treasury’s income, but it also damages the reputation of the agency or intermediary supplying those workers, and can discourage honest clients from engaging with genuine contractors if they’ve had a negative experience.
To tackle false self-employment, tax avoidance measures were announced in 2013’s Autumn Statement, with the Onshore employment intermediaries: false self-employment legislation coming into effect on 6 April 2014.
Read more about Onshore Intermediaries Legislation here.
What does the legislation cover?
The legislation was designed to make sure that agencies hiring self-employed workers liable for PAYE and NICs on the workers income if they are found to be falsely self-employed.
To be genuinely self-employed, there has to be an absence of Supervision, Direction and Control (SDC) of the self-employed worker by the client. If a worker claims to be self employed, but if the client has SDC of the worker then they are likely to be falsely self employed.
What should you do?
Unless you are genuinely engaged on a self-employed basis, your income should be subject to PAYE tax and NIC deductions before you receive it.
Check that your pay has appropriate deductions – if you are employed by an umbrella or are an agency worker then your income should be paid via payroll and you should have a payslip.
It is also worth checking your tax record with HMRC to ensure that they are receiving your tax contributions from your payroll provider / employer. Some unscrupulous businesses may pretend to make deductions from your income but in reality never actually pay HMRC.
If you are genuinely self-employed you will need to submit an annual self assessment return to HMRC in order to pay tax on your income.
In order to help prevent workers unknowingly being falsely self-employed, all agencies are now required to produce Key Information Documents to their workers. These are written summaries about the assignment which, amongst other things, outline how workers are to be engaged and paid for the work that they do.
You can read more about Key Information Documents here.