False, or Bogus, Self-Employment

By September 2, 2015FAQ

False, or bogus, self-employment is the process where a worker is treated and paid as self-employed, but in reality are actually treated as an employee.  So their employment status is incorrect.

What are the attractions?

For an employer the attraction is that they do not have to pay employers National insurance or provide employee benefits such as sick or holiday pay, or even pay the minimum wage.  This means they potentially gain access to a cheaper workforce, and thus a competitive advantage.

For the genuinely self-employed worker the advantage is the freedom, flexibility and opportunity to build up a business for themselves.  The Citizen Advice Bureau cites 75% of their clients as happy with their employment status.

What are the issues?

For the employee they will pay more in National insurance and will not receive any employee benefits such as sick or holiday pay.  Being self-employed may also bring additional costs such as insurance or accountancy.

For the employer they could have to prove the status of the worker, and if they fail will be liable for all tax and National insurance as if the worker had been employed for that period, and probably unable to claim anything back from the employee.

Is there a problem with getting it wrong?

The two main issues are with employees losing their employment rights and the cost to the Exchequer of lost revenue – the recent report from the Citizens Advice Bureau estimated as much as £314 million annually.  So there is a human cost and a financial one.

What is happening now?

HMRC are tackling this, and have openly targeted umbrella companies.  There is a tool available on the HMRC website that can be used to try and establish whether a worker should be classed as employed or self-employed.

Recently there has been more attention both with the CAB investigation and the Office of Tax Simplification report.  The OTS describe employment status as a complex and wide-ranging subject, and acknowledge it will be difficult to solve.

The OTS published their consultation report in July and it is likely there will be changes, as well as an increase in HMRC enforcement actions.  In their earlier March report they do refer to the French system, with a minor fine for a mistake in the region of €1500, and for a deliberate false classification in the region of €45 000 possibly including imprisonment.

It is important to get this right, both for the employee and for the employer.  The Government wants to encourage people to start businesses for themselves, but is also actively targeting employers they believe may be falsely classifying workers.