In recent months, HMRC have begun to take a very hard line with the reclassification of subcontractors to employment status. The effects of this can be bad enough for a business but it now appears that HMRC are taking a much harder line.

In a Special Commissioners case known as Demibourne (SpC486), the company was required to pay tax and national insurance, under a settlement agreed with HMRC, due to the reclassification of an individual as an employee. HMRC practice over many years had been, provided that the individual had paid income tax on a self employed basis, to treat this as tax due on earnings and to collect only NI from the employer. This would include both employer and employee contributions, usually with no deduction available for Class 4 contributions paid.

In Demibourne, HMRC sought a full settlement of the tax as well as the normal procedure regarding NI, which the Commissioners upheld. It would seem that this practice is now becoming the standard approach because:

• the tax paid on a self employed basis will usually be lower than the amount due by an employee;

• if an individual is reclassified as an employee, they can make an error or mistake claim in respect of earlier returns. This will result in a repayment of the tax to the individual.

It now appears that HMRC’s approach is to demand the full tax and NI from the employer. HMRC will only allow a set-off for the amount of tax paid by the individual where the employer can obtain a mandate from the individual stating that the individual will not seek a refund of the tax and requesting that HMRC set the tax paid against the PAYE liabilities of the employer.

Of course, if the employer cannot trace the individuals concerned, employers may have no option but to settle the tax in full.

When a reclassification goes back beyond the time allowed for error or mistake claims by the individual concerned (5 years and 10 months after the end of the tax year), the tax cannot be repaid to the individual. HMRC should give a full set-off for this in the settlement.

A second change is that HMRC officials often used to accept that any reclassification could apply for the current year onwards. HMRC officials now appear to be under instructions to pursue all earlier years rigorously.

If you have contact from HMRC regarding this, or an Employer Compliance Review, please contact us urgently.

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Demibourne case