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.
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]
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OnJuly 17, 2013, posted in: Articles by

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]
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OnFebruary 6, 2013, posted in: Articles by

CIS in a muddle

CIS in a muddle
DAVID KIRK reflects on the quirks of the construction industry scheme
 The CIS operates well in the main.  Recovering deductions already paid by the subcontractor.  Condition B of regulation 9 of the CIS Regulations.  Allocation of CIS deductions against other taxes.
There are some in HMRC who have the curious idea that not everyone who works in the construction industry is totally honest.
Don’t ask why, but whatever the reason, it means that construction companies are singled out for special treatment when it comes to tax.
The result is the construction industry scheme (CIS). Under this scheme, in most circumstances, anyone paying for construction labour, unless operating PAYE, will have to deduct tax at 20% or 30%.
The idea is that the tax is allocated against the recipient’s tax bill, so that HMRC are guaranteed a large portion of the construction worker’s tax due, whatever his nefarious intentions.
The scheme, in some guise or other, has existed for several decades, and it is good to note that relatively few cases concerning its operation have ended up in the tribunals.
This is usually an indication that a piece of legislation has been well thought-out, which by and large it is.
Not perfect
There are, nevertheless, gaps, some of which were exposed by the recent First-tier Tribunal case of Hoskins (TC1972).
Mr Hoskins used a subcontractor, Mr Fletcher, whom he paid without deducting CIS tax, and appealed against assessments totalling £1,879 on the basis that Mr Fletcher had paid his income tax.
Mr Hoskins had asked HMRC to issue a determination under regulation 9 of the Income Tax (Construction Industry Scheme) Regulations (SI 2005/2045) that he need not pay the CIS tax for this reason.
HMRC had refused to do this, and he appealed. The tribunal said that it did not have jurisdiction to hear the appeal: a judicial review would be necessary.
It is worthwhile dwelling on regulation 9, as this lacuna can give rise to some important tactical considerations when contesting a CIS challenge.
The regulation permits HMRC to direct that a contractor need not pay CIS in two circumstances where it is, strictly speaking, due.
Condition A is a commonsense discretion given to HMRC when people are trying their best, similar to the one in PAYE Regulations (SI 2003/2682) regulation 72.
It is curious that the taxpayer can appeal to the tribunal against HMRC’s refusal to give a direction under condition A, but not under condition B (see Regulation 9(3) and (4)).
Mr Hoskins had appealed under condition A as well as condition B and failed. The tribunal judges noted that he had been a subcontractor in the past and knew of CIS because he had had tax deducted from his own pay.
They said he should therefore have considered the matter further before paying Mr Fletcher gross, and had not taken reasonable care to comply with the regulations.
REGULATION 9(3) and (4)
“9(3) Condition A is that the contractor satisfies an officer of Revenue & Customs – (a) that he took reasonable care to comply with section 61 of the Act [Finance Act 2004] and these regulations, and (b) that – (i) the failure to deduct the excess [i.e. the amount not deducted when it should have been] was due to an error made in good faith, or (ii) he held a genuine belief that s 61 of the Act did not apply to the payment. “9(4) Condition B is that – (a) an officer of Revenue & Customs is satisfied that the person to whom the contractor made the contract payments to which section 61 of the Act applies either – (i) was not chargeable to income tax or corporation tax in respect of those payments, or (ii) has made a return of his income or profits in accordance with TMA 1970, s 8 (personal return) or FA 1998, Sch 18 para 3 (company tax return), in which those payments were taken into account, and paid the income tax and Class 4 contributions due or corporation tax due in respect of such income or profits; and (b) the contractor requests that the Commissioners for HMRC make a direction under paragraph (5).”

Allocation of CIS deductions
The lack of a right of appeal on condition B is not the only anomaly. What the condition essentially says is that where the subcontractor has declared and paid income tax or corporation tax on the receipt, HMRC can disapply the requirement to pay tax under CIS (although their policy is still to charge penalties).
This seems fair enough as CIS is not a tax in itself: it is intended as a mechanism for collecting those other taxes. Finance Act 2004, s 62 specifies what happens to a subcontractor who has had CIS payments deducted.
If an individual, the deductions go towards his income tax bill, and then towards Class 4 National Insurance; any excess payment can be repaid under TMA 1970, s 59B.
If the subcontractor is a company, regulation 56 specifies the order in which the CIS money is used to pay the company’s liabilities: employees’ National Insurance, employer’s National Insurance, PAYE, student loan repayments, CIS payments on the company’s own subcontractors, corporation tax, with provision in the regulations for repayment of any excess deduction.
One can perhaps see a further anomaly here, concerning companies. If the CIS money is used towards the subcontractor’s PAYE and National Insurance liabilities, why can the contractor not get a declaration that condition B is fulfilled and no further money needs to be paid?
It surely ought to be simple to establish whether HMRC have lost any money (with co-operation from the subcontractor).
If the subcontractor’s PAYE liabilities for the period exceed the CIS deductions that the contractor was due to pay, then no tax is lost.
If the subcontractor is an employment agency, or an umbrella company, or a largish construction company, then its PAYE liabilities are likely to dwarf its corporation tax liability by a considerable margin.
It makes little sense for HMRC to be able to let the contractor off the hook when the subcontractor has, for example, filed and paid £50,000 in corporation tax, but not when it has filed and paid £750,000 in PAYE and National Insurance, when the first allocation of the CIS money is towards its PAYE/National Insurance liabilities.
This whole attitude fits ill with the acceptance in HMRC’s Construction Industry Scheme Reform Manual at paragraph 83050:
“The purpose of directions under regulation 9(5) is to avoid the situation where HMRC pursues a contractor for a deduction that should have been made where the subcontractor has no liability, or has already met any tax liability, on the sum paid gross.
“It follows the principle that HMRC should not recover more tax from both contractor and subcontractor than is correctly payable by the subcontractor. That is why the relief is sometimes known as ‘double taxation’ relief.”
There is yet another anomaly, and it concerns timing. What happens if HMRC issue a determination that CIS deductions are due, before the subcontractor is due to pay and file its corporation tax?
Once a determination is issued under regulation 12 that CIS deductions are due, the taxpayer’s right to request a regulation 9 direction that it need not be paid expires.
Recently I had occasion to be concerned about this, having made requests for regulation 9 (condition B) directions in respect of a number of subcontractors, and the answers came back – no.
Over the next couple of months I looked at the Companies House records for these subcontractors and saw that a number of them had filed accounts there since HMRC had looked into the matter.
Suspecting that corporation tax returns would have been filed and tax paid at the same time, it occurred to me that had the requests been made at this later point they might have got different results.
What should be done, given there was no right of appeal?
The solution was simple: we made another batch of requests, and, surprise, surprise, this time the answers were more positive.
What this meant was that it was important to spin the correspondence out long enough for the subcontractors to file their returns.
This is not really a very constructive way of engaging with HMRC, and it is to be hoped that they will address these anomalies before too long.
Otherwise, the long-winded procedure of a judicial review is bound to be engaged by somebody who feels hard done by.
Categories:  Taxation of Employees [1] Business [2] Income Tax [3] Tax Topic Tags:  Comment & Analysis [4]
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OnOctober 3, 2012, posted in: Articles by