Tax and Employment Status
Originally sent: October 29, 2007I make no apology for writing yet another e-mail that focuses on tax. We have just had the pre budget report, which naturally focused on taxation. Now Revenue & Customs has released figures showing how much tax of various types they have collected each year for the last 6 years, together with their projection for the current financial year.
The Revenue & Customs figures make interesting reading.
There are 22 different types of tax listed in the Revenue & Customs table. Personally I find it difficult to get my head around the implications when looking at so many figures. And I really do not need to know how the amount collected from the Aggregates Levy compares with Cider & Perry duties. Perhaps you are the same. So I have classified our taxes into five types:
- Earnings Taxes (Income Tax and National Insurance)
- Purchase Taxes (which includes VAT, Stamp Duties etc)
- Company Taxes
- Leisure Taxes (including tax on betting and alcohol)
- Capital Taxes (capital gains and inheritance tax)
As you can see, the projection for 2007-08 is for 55% of the tax take to come from Earnings and only 2% from Capital. The changes announced relating to Inheritance Tax and Capital Gains Tax are therefore unlikely to have a significant direct impact. It is clearly vital for the government to ensure there is as little leakage as possible from the tax on earnings, and to a lesser extent the tax on purchases. We can therefore expect to see continued efforts to tighten up on tax avoidance schemes that focus on earnings, as well as VAT and Stamp Duty Land Tax.
At a recent tax conference I learned that tax advisers are finding local inspectors are concentrating more and more on “employment status” – i.e. the classification of staff as employed or self-employed. This has always been an important topic, but the view in the profession is that there is now an all out attack by the Revenue on businesses using self-employed staff. Not surprising when you realise that for every reclassification from self-employed to employed of a person earning £25,000 (just under the national average wage) the Revenue will gain more than an additional £3,000 every year – and probably an amount equal to a year or more of earnings in the year they spot this (taking account of the back taxes, interest and penalties they will claim).
Perhaps now is the time you and your clients should review your staff arrangements. Do you have any self-employed staff, and if so how certain are you that the Revenue could not regard them as being employed?
Key factors which the Revenue will argue mean an individual is employed are if the individual:
- has no right to substitute somebody else to do his job
- would not have to pay substitutes personally if substitution were allowed
- cannot decide unilaterally where and when to do the work
- has to follow instructions on how to carry out the work
- does not take financial risk
- does not use his own tools and materials
- does not have to rectify any errors at his own cost in his own time
- is paid the same amount regardless of the number or length of jobs done
- receives benefits which would normally be given to staff – e.g. holiday pay
- is regarded as an integral part of the business – even, for example, if this is simply that he is invited to the staff Christmas party.
Bear in mind that it is not enough simply to answer “no” to only one or two of the above. In order to establish an individual is self-employed you need to answer “no” to most of them, and probably also justify why any “yes” answer should not be taken as an indicator of employed status.
If you find you have some “employees” who have been treated as self-employed, it would be best to reclassify them now rather than waiting for a payroll inspection to reveal this. If you wait, you will almost certainly suffer back tax, penalties and interest. If you act now, and find a clear justification for the change in employment status (which is usually not so difficult if you think creatively) you will probably avoid a lot of heartache – not to say a big immediate drain on your profits and cashflow if you suffer a payroll inspection.
Adviser Breakthrough Training Solutions Ltd. takes no responsibility for loss occasioned by any person acting or refraining from action, or in consequence of any other person acting or refraining from action, as a result of the material in this article.
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