Employment tax has been the focal point for tax legislation change over the last five years and as a result HMRC have increased policing in this area. Not only have we seen an uptake in HMRC checks and enquiries into employer compliance, but we have also seen more interest in employment tax as part of due diligence exercises – with advisors recognising the increased risk of HMRC opening an enquiry into the business’ employment tax compliance.

The below client case study is a recent example of how our employment team were able to support our client through the due diligence process and subsequent voluntary disclosure made to HMRC.

Background
EL is a large specialist construction company, whose owners were looking to exit the business. As part of the due diligence for the transaction, the buyers of EL raised concerns about the contractors engaged by EL being paid off-payroll but having traits of employees in the way they if which they worked for EL. Consequently, the buyers wanted a £12m amount held in escrow to protect them from the liability resulting from HMRC reclassifying the contractors as employees and deeming EL to have failed to withhold PAYE and national insurance.

Our involvement
Our employment team were able undertake review the contractor population to distinguish and group them based on the likelihood of HMRC successfully reclassifying them as employees. We were also able to determine the likely self-employed tax and national insurance the contractors will have paid, which could be used to offset the underpayment from EL, if HMRC were successful in reclassifying the contractors as employees. Having undertaken this review, we then put our findings to the buyer’s advisors and were able to successfully negotiate down the amount held in escrow to £5m, significantly improving the amount paid to the vendors on completion of the deal.

Furthermore, we agreed with the buyer’s advisors that we would be party to the voluntary disclosure being made to HMRC following completion of their purchase of EL. Being party to the voluntary disclosure, we were able to protect our client’s interests and look to maximise the amount returned to our client from the escrow.

Our approach to protecting our client’s interest was twofold; firstly, we helped draft a disclosure that highlighted the employment status factors which best demonstrated the contractors were genuinely self-employed, reducing the risk of HMRC deeming the contractors to be employees. Secondly, we managed to get the buyer’s advisors to agree to an approach to the disclosure that would look to get confirmation of the contractors’ employment status going forward and in doing so not offer any historic settlement to HMRC