Be aware: HMRC payroll investigations on the rise

Recent figures released through a Freedom of Information Request have revealed that payroll investigations last year led to HMRC collecting £819 million of additional tax, a figure that represents a year-on-year jump of 16%.

It has been suggested that the increase is due to a ‘grey area’ over whether a taxpayer is considered to be ‘employed’ or ‘self-employed’, with this area being targeted by HMRC in order to eradicate any ambiguity and categorise as many people as possible as being employed. Doing so means that tax can be deducted at source and reduces the scope for claiming expenses. However, HMRC have denied this interpretation, stating that a taxpayer’s status as either employed or self-employed is ‘never a matter of choice; it is always dictated by the facts and when the wrong tax is being paid we put things right.’

The ambiguity over employment status has arisen thanks to the gig economy, which has recently created political anxieties for the government. Following the Taylor Report, which investigated the gig economy and made recommendations for reforms needed, the government has indicated that the ‘worker’ category will change to ‘dependent contractor’ in the near future. Dependent contractors will have worker rights that self-employed workers do not, but they won’t be considered employees, thereby straddling the current divide between the two.

Whilst this is likely to go some way to removing the grey area which is causing the controversy, introducing dependent contractor status will remove the advantages businesses currently get from using a contractor. It’s likely that a test will be implemented for dependent contractors, which will place much greater emphasis upon control. It has been suggested that such a test will ultimately place limitations on the number of self-employed people, which has grown considerably in recent years.

Whatever the reason for HMRC’s increased payroll investigations, businesses need to take extra care to ensure that their payroll is completely accurate to avoid incurring any unnecessary penalties. Communicating with whoever handles your accounts and acting on their advice wherever necessary is vital to make sure the taxman has no reason to claim additional tax from your business.