HM Revenue and Customs (HMRC) says commercial fleet operators risk falling foul of the law if the tax status of self-employed drivers doesn’t “stack up”.
The warning comes in the wake of a landmark ruling which found Costelloe Business Services breached strict tax rules in the way it accounted for its agency workers.
They were encouraged to set up limited companies in order to avoid income tax and national insurance. Remuneration was by way of a small salary, expenses and a large dividend which did not attract PAYE and NICs.
However, after a nine-year battle, a tax tribunal finally ruled that Costelloe was operating a tax avoidance scheme.
HMRC says it expects to recoup around £9m from the operation, with individual workers facing retrospective tax bills of up to £45,000.
It was the first case brought under the managed service company (MSC) legislation and, according to HMRC, it will not be the last.
“We’re seeing more schemes being marketed to this industry, but they often don’t work and they often don’t stack up,” said Mark Frampton, leader of the employment policy team at HMRC.
Costelloe set up and ran limited companies for hundreds of health professionals, including doctors and social workers, but its methods are much the same as some ‘umbrella’ companies which provide self-employed agency drivers.
Frampton said: “If you’re sold one of these schemes, where other people are controlling and profiting from the workers, then you will fall foul of this managed service legislation.”
And, he warned: “It doesn’t just have tax consequences for the drivers, it potentially has consequences for the people who are behind the scheme. That could be the promoter, it could be the agency and ultimately it could be you.”
Frampton told delegates at the Road Haulage Association (RHA) Compliance Conference that in some extreme circumstances drivers are not even aware that they are registered as a company director.
He said: “Those schemes are being sold right now and people should be very wary of them.”
HMRC does allow self-employed status for owner-drivers who work mainly for one company, but the driver has to demonstrate a degree of control over the vehicle’s use, and must be entitled to provide another driver as a substitute for himself if he or she wishes.
The tax office’s assessment of whether somebody is an employee or self-employed will apply the same tests that the courts and employment tribunals apply.
The written terms of the contract will be taken into account, but it will also be about how the contract operates in practice and how that work has evolved.
Frampton called it the ‘reality gap’: the gap between the written contract and what happens in practice.
He explained: “You need to know that both of those things align. What you’re actually doing and what the written terms say are consistent with being employed or self-employed.”
A major deciding factor will be the ownership of the vehicle. “It’s all about the financial risk that the worker takes,” said Frampton. “If the person is taking a significant financial risk, they’re buying or leasing the vehicle, then they’re almost certainly going to be considered self-employed.”
According to an HMRC employment status manual, where the vehicle is leased from the same concern that the driver is working for, HMRC will examine the terms of the lease.
It says that a number of conditions are likely to be required to be met in order for a driver to be established as self-employed. They include: the lessee having total control of, and responsibility for, the vehicle for the duration of the lease; the lessee being responsible for the vehicle’s maintenance, insurance, and fuel; a commercial rent is paid, protecting the investment of the lessor; and the driver is legally responsible for obtaining an operator’s licence for the vehicle.
Where the haulier retains control and responsibility for the vehicle, enabling it to be used by other drivers, and it is maintained, fuelled and insured by the haulier, or where it is ‘paid for’ by a deduction from wages based on hours of use, mileage or a clearly non-commercial amount, the arrangement is unlikely to establish the driver as having self-employed status.
Frampton said: “HMRC is always on the lookout for artificial, circular transactions, where the real cost is being underwritten. It’s all about the driver bearing the cost.”
He urged operators unsure about the rules to visit the HMRC website, speak to organisations like the RHA or a tax specialist, and to inform them if they think an operator is not playing by the rules.
He concluded: “Keep telling us about those people who are not doing the right thing then we can help create a level playing field and make sure you’re not undercut by unfair competition.”