5 Red Flags That Indicate False Self-Employment

7 September 2022

As an employer it is very important for you to ensure that you are not engaging workers in your business who are falsely self employed.

Often agency workers present the biggest risks of false self-employment to companies when they are engaged through recruitment agencies and paid via LTD Companies rather than PAYE or PAYE Umbrella.

Here are some of the biggest red flags that would indicate that a worker is falsely self employed.

1. Does not have the right to substitute themselves with another worker to get the job done

When engaging a self employed worker it is expected that they may substitute themselves with another worker at any time so that they can complete the task in hand. Often this would not just need to be in the contract, but it is better to demonstrate that it has actually happened.

2. Does not take financial risks as far as payment is concerned

The worker needs to take some sort of financial risk on the contract. If they do a bad job and still get paid by the amount of hours that they do then this is a big indicator of false self employment. Ideally they should work on a fixed price basis to deliver the project or service.

3. Does not provide their own equipment

If they don’t provide their own tools and equipment and purely rely on yours, this is an indicator of being employed. A carpenter would be expected to bring their own tools, a chef their own knives for instance.

4. Does not set their own hours and is closely monitored by the organisation for which they work (for example through 'vehicle tracking' or other forms of software)

Turning up at 9am and leaving at 5pm is a big NO NO. The worker should be free to complete the work at whatever time suits them to be able to get the job done.

5. Reliance on a single client.

If the majority of the revenue of the worker is from one client, logical independence is lost, and self-employment is called into question. It is better for workers to have multiple sources of income to demonstrate their self employed status.

What happens if you engage workers who are falsely self employed?

HMRC has powers to investigate the tax compliance of organisations, and this power will stretch to allow them to explore the employment status of any off-payroll workers providing their services to private sector clients.

Where it is found that an individual has been incorrectly categorised as being outside of IR35, the HMRC will issue a determination requiring the unpaid PAYE tax and National Insurance Contribution liabilities, including any late payment fines and interest to be paid by the end hirer.

On top of those liabilities and fines, HMRC have the discretion to issue a penalty ranging from 0-100% of the initial outstanding liability. The weight of the penalty will rest on a number of factors, for example how co-operative your organisation has (or has not) been throughout the enquiry process, and to what extent reasonable care has been taken over the application of IR35 to any off-payroll worker. If an incorrect determination has been made in the absence of reasonable care, it is likely that a severe penalty would be awarded alongside the unpaid taxes.

It is clear that non-compliance with IR35 can bring with it potentially crippling financial implications for a business.