Autumn statement submission: David Kirk calls for the abolition of employers’ NI.

The Treasury has asked for original and innovative ideas to be included in the Autumn Statement (see https://www.gov.uk/government/news/autumn-statement-2014-have-your-say). David Kirk submitted the following.

I understand that the Treasury is seeking original and innovative ideas for the Government’s Autumn Statement. As to my credentials for this proposal, I am a Chartered Accountant and Chartered Tax Adviser who specialises in payroll taxes (PAYE and NI) and employment status.

I should like to propose the abolition of Employer’s National Insurance, and the replacement of the lost income by a higher rate of Corporation Tax. I do not know how much it would be necessary to put the Corporation Tax rate up by, as I do not have access to the figures, but my guess would be about 3%.

Employer’s NI is a tax on jobs, and this would give a real incentive to employers to hire more people. It also distorts the tax system, by encouraging people to reclassify themselves as self-employed (both genuinely where it makes no commercial sense to do so, and falsely), or to set up companies and either avoid or evade the intermediaries provisions known as IR35 – which are far more about NI than they are about Income Tax. Corporation Tax by contrast does not distort the tax system, and has the added advantage of being paid by businesses that have made a profit, and so (presumably) are in a position to pay it.

The distortions caused by Employers’ NI are huge. As an example (these are 2013-14’s figures – I have not reworked them but this year’s will not be far different) an employed person earning £25,000 a year will pay £5,182 in income tax and National Insurance, leaving him with £19,818 to take home. His employer will also have to pay £2,388 in National Insurance, meaning that the total cost of employing this person will be £27,388. If this company were to spend £27,388 to procure an independent contractor to do the same work, that contractor would not only receive more but would pay less in tax. He would be in pocket to the tune of £21,891. If the contractor were then to incorporate his business, he could get out of National Insurance altogether and end up with £23,450.

With differences like this, it is not surprising that there has been a rush to self-employment and incorporation over recent decades. There are benefits for employers too: not only can they lower the rates and recoup some of the difference for themselves; there are also a great many employees’ rights that independent contractors do not have and that they, the employers, therefore cannot get sued for. Also, the fact that the self-employed are responsible for their own tax attracts to this status the kind of disreputable people who have no intention of paying their fair share. Nor is it surprising that some of this purported self-employment is bogus. The combination of economic and fiscal pressure for self-employment and a very hazy grey area makes this inevitable. The courts are always on the look-out for a sham, but it has to be said that they rarely find one.

Governments have gone to some lengths to combat this, with the agency rules (1977), IR35 itself (2000), the managed service company rules (2007), and now the onshore and offshore intermediaries rules. It has to be said that not all of these efforts have been notably successful. Sometimes other tax changes inadvertently make incorporation of one-man bands more attractive, such as the abolition of Advanced Corporation Tax in 1999.

Corporation Tax, by contrast, does not distort the tax system, particularly when (as now) it is levied at the same rate as basic rate Income Tax. A move from one to the other would take away

considerable incentives to play the system. It could also simplify Government finances quite a bit.

How then could the revenue from employer’s NI be replaced? From what I can see Employer’s NI is paid principally by the following types of employer:

Central government

– this is effectively circular money: the various departments and agencies would simply get their allocations cut by the amount of NI they would be saving.

Local government

– as local government is largely financed by central government the same could apply here: it could get its grants cut by a corresponding amount;

Charities

– much charity work is also financed by government (central and local, but I suspect largely central), and grants could be cut accordingly. To the extent that it is financed by outside sources this would represent increased income for the charities, which could be defended on policy grounds.

Companies –

these would pay a higher rate of Corporation Tax to compensate. I would suggest that the aim should be to present this change as revenue-neutral.

Partnerships and LLP’s –

these would gain from this measure. However partners in the larger partnerships (where most of the NI would come from) will pay higher rate or additional rate tax, and so a noticeable proportion of the money saved would come back via tax on increased profits: this could also be defended on policy grounds as these partnerships will anyway be paying higher rates of tax on their profits than companies who may be their direct competitors.

Individuals –

these will also gain – however most of these will be in business and so the same considerations will apply as with partnerships. At the micro level the Employment Allowance has already taken many businesses out of Employers’ NI.

One other point to note is that employers’ NI contributions are not allocated to the account of any individual, unlike the corresponding employees’, so there are no considerations of people losing benefits as a result. Also, the absence of Employer’s NI will make it easier to align Employees’ NI with PAYE, which I understand is a policy objective of the Government.

I do understand that the Government places much store on the headline rate of Corporation Tax and will be wary of seeing this fall below 20% when so much effort has been made to get it down to that level. In my view the possibility of being able to advertise to inward investors that there are ‘no payroll taxes for employers here’ would far outweigh any damage that might be done by seeing the headline rate of Corporation Tax rise.

Back in the 1980’s Nigel Lawson aimed to abolish (and generally succeeded in abolishing) a tax in each budget. This proposal would enable the Chancellor to pick up that mantle

Why cant I go on the CIS

It is a common misconception that anyone working in the construction industry can decide for himself whether he can go ‘on the tools’ (i.e. be paid as self-employed under the Construction Industry Scheme) or ‘on the books’ (be paid as employed under PAYE).  No more can the construction company decide for itself which it is to be.
There are a number of tests to decide which it is to be, but the personal preferences of the individual worker and the company do not come into it.  Rather, the correct categorisation is decided by the nature of the relationship between the two.  Whole books have been written on this subject, but you can get a long way by asking yourself:
– Are you expected to complete a particular job (such as to build a wall or make a staircase)?  If so you are probably self-employed and can go on the CIS.
– Are you expected to know how to do the job asked of you, or does someone tell you how to do it?  If you require no supervision and get none, you are likely also to be self-employed.
– Are you there to do what the boss asks you to do between the time you start and the time you finish?  If so you are probably employed and should go on PAYE.
However these are only indicators.  Specialist advice will almost always be needed if you have a dispute about it.
David Kirk FCA CTA is a freelance tax consultant specialising in the intermediary sector.  He can be obtained on 0845 519 5041 or at dk@david-kirk.co.uk.

Personal PAYE

A client who is a UK taxpayer is employed in this country as the representative of an overseas business. The client works on his own initiative from an office in his own home, but how is his income tax liability collected?
My client is a UK citizen who works as the UK representative of a firm that is based abroad. It appears that he has a contract of employment and is paid a salary with additional commission based on results. His offshore employer provides instructions, leads and advice, but he also works on his own initiative.
He works from an office in his own home. My question is how his UK income tax liability is collected. The employment has only just started and it seems that the employer has proposed to pay him gross and that he will settle the tax and other liabilities.
However, should the gross income simply be declared on his annual self-assessment tax return or should he set up a PAYE scheme and pay under this?
Furthermore, what is the Class 1 National Insurance situation? Do both the client and the employer have a liability?
Finally, there is a proposal that an employee from abroad will be seconded to the UK to work alongside my client if business takes off as expected. They will probably then work from a serviced office, and I anticipate being asked to deal with that person’s UK liabilities as well. Will the same position apply to the offshore employee?
I hope readers can advise.
Query 18,222 – Lonely
Reply from David Kirk
The employer is outside the PAYE net if it has no “tax presence” in the UK, which means not being resident and not trading through an agency or permanent establishment. HMRC’s views on this matter can be found in the PAYE Manual at PAYE81610, and follow the reasoning given in Clark v Oceanic Contractors Inc (1982) 56 TC 183.
If the employer has no tax presence, the employee should register to pay tax through self- assessment. This should be done within the normal time limits on form SA1.
The criteria for deciding whether the employer is required to pay Class 1 National Insurance are, to all intents and purposes, the same; and the client should then register to pay primary (employee’s) contributions only by writing to HMRC NICEO International Caseworker Team, Benton Park View, Newcastle upon Tyne NE98 1ZZ, giving their full circumstances.
2
Care needs to be taken that the employee’s presence in the UK does not, of itself, constitute an agency, and thereby give the employer a tax presence. This will depend very much on what the employee does and what his powers are.
For this, there needs to be a trading presence and for the agent to “[have] and habitually exercise [in the UK] authority to do business on behalf of the company”.
There is no real guidance as to what “doing business” means but, for a trading presence, see FL Smidth & Co v Greenwood (1921) 8 TC 193, which is commented on by HMRC in the International Manual at INTM263050. Lord Atkin asked: “I think that the question is, where do the operations take place from which the profits in substance arise?”
The employer could sign up to operate PAYE voluntarily under a modified scheme for expatriate employers. I do not recommend this for three reasons:
 HMRC are likely to insist that the employee files a tax return anyway, so there is an extra layer of bureaucracy;  if there are adjustments, the process of recording them and reclaiming overpayments is a great deal easier under self-assessment than under PAYE; and  HMRC say that they will exercise common sense and flexibility under the RTI (real time information) reporting requirements where expatriate payrolls are concerned, but it remains to be seen how this will work out in practice. It is altogether easier not to have to try.
Hopefully the above information will enable Lonely to navigate his way through this.
Categories:  Income Tax [3] Taxation of Employees [4] Tax Topic Tags:  Forum & Feedback [5] [6] [6] [6] [6] [6]
Source URL: http://www.taxation.co.uk/taxation/Articles/2013/07/17/310691/personal-paye
Links: [1] http://www.lexisurl.com/UKNIC [2] http://www.lexisurl.com/NICEM [3] http://www.taxation.co.uk/taxation/category/income-tax [4] http://www.taxation.co.uk/taxation/category/income-tax/taxation-employees [5] http://www.taxation.co.uk/taxation/category/content-type/forum-feedback [6] http://www.addthis.com/bookmark.php?v=250

Bringing up baby

A couple regularly engage the services of a babysitter, but are unsure of her employment status. Should they be concerned by the introduction of real-time information?
I am a full-time employee for a mid-tier firm of accountants. I have been looking at the real-time information (RTI) rules in order to bring some of my clients up to speed, but my research has given rise to queries about my own personal duties.
Although I am not in business myself, my husband and I regularly engage the services of a babysitter.
Although I suspect that there are some babysitters who are in reality self-employed, I am not entirely convinced that this would be the correct legal analysis, at least in our case, even if that would give us a convenient way out of our obligations under the PAYE code.
Several years back, I raised this with HMRC and was told that we need not worry about PAYE at all as long as the weekly payments were below the Class 1 National Insurance contributions threshold (on a typical weekend we would pay less than half the NI threshold). Consequently, we have paid our babysitters cash in hand with a clear conscience.
With RTI, however, I am less convinced that we can take such a blasé attitude. In the course of my research, however, I am now beginning to wonder whether we should have been completing P38As in previous years.
Surely, PAYE is not meant to be this complex. But there must be some simple way out, which does not amount to turning a blind eye to the rules.
I look forward to reading what readers might suggest. Query 18,132 – Ravi
Reply from David Kirk, author of Employment Status – the Tax Rules
Whether or not a babysitter is self-employed will depend on the facts, and I would suggest that there is a difference between a babysitter who is selected by you as a family friend (likely to be employed) and someone who “does babysitting” (likely to be self-employed).
The traditional employment status tests can be grouped together into three, as a result of the judgment in Ready-Mix Concrete (South-East) Limited v Minister of Pensions and National Insurance (1968 1 All ER 433).
First, does the babysitter have to provide her own service in exchange for pay? Answer yes – she is obliged to remain en poste until you return (even if you are late), and you would not be very pleased if you returned home to find that she had deployed a substitute.
Second, do you control when she works, where she works, what she does and how she goes about it? Answer: yes to when and where, and you would probably expect to have the right to control the other two factors. This would probably be sufficient control to make you the “master”, as the judgment puts it.
Third, is the babysitter in business on her own account? It is here that the distinction comes in.
Someone who is known to be available for babysitting almost certainly is, whereas a friend’s daughter whom you happen to ask to help out one night is probably not.
Your problem is that, if the former is the case, you may well not know about it: unlike the other tests, which rely on the relationship between the two parties, this one is entirely down to the babysitter.
However, I suggest that the case that you need to follow is that of the “Reward” (1818), 2 Dods 265, 165 ER 1482), which enunciated the ancient legal principle of de minimis non curat lex (“the law does not concern itself with trivia”). What are the consequences of making a wrong decision?
First, in view of what is written above, most babysitters are likely to be self-employed, so HMRC are unlikely to challenge this even in cases where there are pointers the other way. (There is nothing on their website or in the Employment Status Manual as far as I know.)
Second, there are unlikely to be many babysitters receiving more than £144 a week, so there will be no National Insurance implications.
Third, even if on a technical basis you should be applying tax code BR, a good many babysitters do not earn the £8,105 a year that is currently necessary to be paying income tax, so they would simply be able to claim back any tax that you paid over.
Filling in a form would, in practice, serve no useful purpose and, considering the work that it would cause HMRC, I do not believe that they would wish you to do it.
Tax Topic Tags:  Forum & Feedback [1] Tags:  RTI [2] [3] [3] [3] [3] [3]
Source URL: http://www.taxation.co.uk/taxation/Articles/2013/02/06/53401/bringing-baby
Links: [1] http://www.taxation.co.uk/taxation/category/content-type/forum-feedback [2] http://www.taxation.co.uk/taxation/category/tags/rti-0 [3] http://www.addthis.com/bookmark.php?

Pay day by day tax relief models

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