[Tax Corner] The problem with hidden employees

Since starting out in tax in 1998, one of the perennial employer compliance issues I come across in various guises is that of ‘hidden employees’.

In this article, I explain who they are, why they matter and what can be done.

Who are they?

By hidden employees, I mean those employees or 'should be employees' who, for a range of reasons, are simply not on your radar when it comes to employer compliance.

They include:

• Contractors who your business may treat as self-employed but who are in fact employees for tax purposes and who should be on your payroll
• International commuters who live in the UK but who are employed and work for another part of your group outside the UK
• Short-term business visitors who are employed by a non-UK Company in your group, are paid outside the UK but undertake duties for your company in the UK
• Non-resident directors who live outside the UK, are perhaps paid outside the UK but attend UK board meetings from time to time

In all of these cases, there are highly likely to be PAYE, NIC and other employer compliance obligations. However, despite the risks they present (see below), there is often unintended non-compliance across the areas above.

Why does it matter?

The problem with hidden employees is the unknown unknowns. When I get asked to help deal with a hidden employee-related issue, it is normally because something has gone unexpectedly awry (e.g. someone has received a tax demand, you have had a PAYE audit or someone in the know stumbles across something etc.). This area can really throw up some surprises.

If you don't have sight of hidden employees, you will not know if you have:

• current unfulfilled payroll and tax compliance obligations;
• historic financial exposure (underpaid PAYE and NIC) or the extent of this exposure. HMRC can normally look back 4 tax years for PAYE and 6 tax years for NIC. Once you add penalties and interest on top, the bill can soon mount; or
• exposure to litigation (I refer here to the contractors who are treated as self-employed but may actually be deemed employees for UK employment law purposes). There have been numerous court cases in this area.

Despite this, hidden employees are often overlooked. There are no doubt a multitude of reasons for this. Here are some of my perceptions:

• Lack of visibility. Quite simply, it is often much harder to try to identify where you may have an issue when it comes to hidden employees because, by their very nature, they and the issues that they may create are not in plain view. It is often only when there is some event (e.g. a tax authority audit) that the issue comes to the fore.
• Who is responsible anyway? Even where we know there may be a potential issue (e.g. you have noticed a lot of non-UK workers in the building of late), you may not see it as your responsibility to get involved (or you may simply not want to add another problem to your in-tray!).
• Complexity/lack of clarity. Even if you manage to identify hidden employees, determining whether or not they create an issue for your company can be tricky. The rules are not straightforward and are often nuanced. Of course, it is naturally difficult trying to justify spending time (and cost) on something which may or may not be an issue. Even if you become convinced, convincing others can be even harder, on the same basis! 

No theoretical risk

This is no theoretical risk. I have come across many examples (from minor to significant) where hidden employee-related issues come to light and come to light too late:

• In one example, an organisation engaged an individual on a self-employed basis for over 10 years. However, following an enquiry, the individual was deemed to be employed rather than self-employed and the company was required to pay over £100k in unpaid historic employers National Insurance Contributions, plus penalties and interest
• In another case, an employer did not fully understand the UK rules on short-term business visitors and had concluded that no action was required on account of the visitors being employed and paid by a non-UK firm. This led to a review by HMRC and a settlement of historic unpaid PAYE and NIC which exceeded £0.5 million

What can be done?

Taking action is key to preventing the unexpected but is seldom easy in this area. Where do you start? Below, I outline some thoughts which may help you develop your thoughts with regard to your own organisation.

Of course, the time you spend and the extent to which you need to work on this will largely depend on the size of your company. However, the broad themes should be useful to companies of all sizes.

Written by:

Lee McIntrye-Hamilton
Partner, Global Mobility & International Employment Tax
Blick Rothenberg
lee.mcintyre-hamilton@blickrothenberg.com

Since starting out in tax in 1998, one of the perennial employer compliance issues I come across in various guises is that of ‘hidden employees’.

In this article, I explain who they are, why they matter and what can be done.

Who are they?

By hidden employees, I mean those employees or 'should be employees' who, for a range of reasons, are simply not on your radar when it comes to employer compliance.

They include:

• Contractors who your business may treat as self-employed but who are in fact employees for tax purposes and who should be on your payroll
• International commuters who live in the UK but who are employed and work for another part of your group outside the UK
• Short-term business visitors who are employed by a non-UK Company in your group, are paid outside the UK but undertake duties for your company in the UK
• Non-resident directors who live outside the UK, are perhaps paid outside the UK but attend UK board meetings from time to time

In all of these cases, there are highly likely to be PAYE, NIC and other employer compliance obligations. However, despite the risks they present (see below), there is often unintended non-compliance across the areas above.

Why does it matter?

The problem with hidden employees is the unknown unknowns. When I get asked to help deal with a hidden employee-related issue, it is normally because something has gone unexpectedly awry (e.g. someone has received a tax demand, you have had a PAYE audit or someone in the know stumbles across something etc.). This area can really throw up some surprises.

If you don't have sight of hidden employees, you will not know if you have:

• current unfulfilled payroll and tax compliance obligations;
• historic financial exposure (underpaid PAYE and NIC) or the extent of this exposure. HMRC can normally look back 4 tax years for PAYE and 6 tax years for NIC. Once you add penalties and interest on top, the bill can soon mount; or
• exposure to litigation (I refer here to the contractors who are treated as self-employed but may actually be deemed employees for UK employment law purposes). There have been numerous court cases in this area.

Despite this, hidden employees are often overlooked. There are no doubt a multitude of reasons for this. Here are some of my perceptions:

• Lack of visibility. Quite simply, it is often much harder to try to identify where you may have an issue when it comes to hidden employees because, by their very nature, they and the issues that they may create are not in plain view. It is often only when there is some event (e.g. a tax authority audit) that the issue comes to the fore.
• Who is responsible anyway? Even where we know there may be a potential issue (e.g. you have noticed a lot of non-UK workers in the building of late), you may not see it as your responsibility to get involved (or you may simply not want to add another problem to your in-tray!).
• Complexity/lack of clarity. Even if you manage to identify hidden employees, determining whether or not they create an issue for your company can be tricky. The rules are not straightforward and are often nuanced. Of course, it is naturally difficult trying to justify spending time (and cost) on something which may or may not be an issue. Even if you become convinced, convincing others can be even harder, on the same basis! 

No theoretical risk

This is no theoretical risk. I have come across many examples (from minor to significant) where hidden employee-related issues come to light and come to light too late:

• In one example, an organisation engaged an individual on a self-employed basis for over 10 years. However, following an enquiry, the individual was deemed to be employed rather than self-employed and the company was required to pay over £100k in unpaid historic employers National Insurance Contributions, plus penalties and interest
• In another case, an employer did not fully understand the UK rules on short-term business visitors and had concluded that no action was required on account of the visitors being employed and paid by a non-UK firm. This led to a review by HMRC and a settlement of historic unpaid PAYE and NIC which exceeded £0.5 million

What can be done?

Taking action is key to preventing the unexpected but is seldom easy in this area. Where do you start? Below, I outline some thoughts which may help you develop your thoughts with regard to your own organisation.

Of course, the time you spend and the extent to which you need to work on this will largely depend on the size of your company. However, the broad themes should be useful to companies of all sizes.

Written by:

Lee McIntrye-Hamilton
Partner, Global Mobility & International Employment Tax
Blick Rothenberg
lee.mcintyre-hamilton@blickrothenberg.com