The Risks of Engaging Employees as Sham Contractors

Some businesses engage individuals as contractors when, in practice, the working arrangement looks more like employment. HMRC refers to this as sham contracting.

Understanding how HMRC distinguishes genuine contractors from employees can help businesses and individuals recognise when arrangements may not be treated as intended, particularly where advice from a tax consultant in London was not sought at the outset.

Tribunal Ruling on Employment Status: Substance Over Contractual Labels

A recent Tribunal ruling confirmed that employment status depends on the reality of the working relationship, not the label used in a contract.

Mr Gooch worked for BFREPA for over 12 years under what was described as a self-employed “contracted services” arrangement. Although he invoiced monthly and was paid a retainer, his role evolved into a senior executive position. In 2023, concerns were raised that the arrangement resembled employment, and his contract was later terminated.

The Tribunal found that he was in fact an employee. Key factors included personal service, significant organisational control, long-term integration into the business, and restrictive clauses limiting outside work.

The decision reinforces that calling someone “self-employed” is not enough. Where control, mutual obligations and integration point to employment, tribunals will treat the individual as an employee — with all associated legal rights and employer obligations.

What Is Sham Contracting?

Sham contracting occurs where an individual is described as self-employed or engaged as a contractor, but the reality of the working relationship reflects employment.

HMRC looks beyond contracts and job titles and focuses on how the relationship operates in practice.

How HMRC Assesses Working Arrangements

When reviewing whether someone is genuinely self-employed or effectively an employee, HMRC considers a range of factors, including:

• The level of control exercised over the individual’s work
• Whether the individual is required to work personally
• How and when the individual is paid
• Whether the individual takes on financial risk

No single factor is decisive. HMRC looks at the overall picture rather than relying on one test alone, a point often emphasised by a tax specialist in London when reviewing employment status risks.

Why Misclassification Can Cause Problems

Engaging someone as a contractor when the arrangement resembles employment can create uncertainty around tax treatment and responsibilities.

This is particularly relevant where individuals work long-term for one engager, follow set hours, or are integrated into the business in a similar way to employees.

Contracts Versus Reality

Written contracts are important, but they do not override what happens in practice.

If day-to-day working arrangements do not reflect what is written in the contract, HMRC will generally place more weight on how the work is actually carried out.

HMRC Guidance on Employment Status

HMRC provides guidance on determining employment status and distinguishing between employees and contractors on
GOV.UK.

Could Your Contractor Arrangements Be at Risk?

Whether an arrangement is treated as employment or genuine self-employment will depend on the full nature of the working relationship, rather than how it is labelled in name alone. For individuals and businesses in Kingston upon Thames and nearby areas such as Surbiton and Norbiton, CIGMA Accounting can review the facts of the arrangement and help assess how HMRC is likely to interpret it in practice.