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Self assessment for dubious employment status

If an employer engages a worker under an arrangement that is 100% that of employment, but insists the worker is self employed, what does the employee need to do to ensure compliance?

I do not feel that registering as self employment is correct (as they are not self employed, despite what their employer might want), but as they know they aren't getting tax deducted at source, they therefore know they have untaxed income and thus have a liability to register under SA.

Would it be correct to therefore complete the employment pages and state no tax deducted, and give the employer's details? There is no PAYE scheme in place.

The employee wants to pay taxes due, but is more concerned with NI. They also want to keep their job.

I don't see any merit in shoe-horning this person into self employment in SA as they are just a worker, no real expenses, and indeed they are not truly self employed.

The correct answer is of course, "The employer needs to operate PAYE correctly" but this is not going to happen unless HMRC hit him with a big stick. There is no guarantee that shopping the employer will result in the use of said stick.

I am of course aware of MLR implications, I'm more concerned with the practical issues and how to protect the client.

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09th Aug 2011 13:52

the dubious nature of this means that if the person wants to make sure his national insurance contributions are paid and his tax he should  register. It is quite obvious it would not help the "dubious" situation if the emplyee names his employer on his employment pages-with the emploter's reference.

 

The employee would be saddled with a payroll tax liability which the employer should have caried and it might spark a PAYE enquiry.....

the client must decide if they wish to "shop" the hand that feeds them and loose the role or take responsibilty for his own tax.

 

in employment law a case for employment could easily be proven.... if it had been continuing for some time(beyond the 1 year limit)(previously 2 years under thatcher)

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09th Aug 2011 14:03

How is he paid?

Is he/she expected to raise an invoice? Do they receive a pay slip?

What contract document (if any) governs the 'arrangement' has a p46 or p45 been asked for?

I presume the employer has no intention to pay holiday/sick pay?

If the employee receives a weekly/monthly statement showing 'pay' then they should expect the employer to have deducted the necessary tax and NI and the employer is liable if they don't - if they have been asked to produce an invoice then they are self employed (even if they're not!) 

HMRC won't accept (on line) an SA employment page without a PAYE reference.

 

 

 

 

 

 

 

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By PennyC
09th Aug 2011 14:21

What's the problem?

If HMRC successfully challenge the status, the liability falls on the employer. Your client should register as self-employed, and let his 'employer' worry about the consequences.

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By Monsoon
09th Aug 2011 14:22

Employment

Thank you.

To the best of my knowledge there is no paperwork: no invoice, no payslip, and no contract, either of service or for services. This employer has been operating like this for years and is open about the fact he is non-compliant. No holiday or sick pay. Just an exchange of money.

Memyself-eye, can you point out where someone is deemed to be self employed even if they are not? I believe there is a precedent whereby the badges of trade fail if the "trade" is one where people are generally not in business in that trade, e.g. a self employed shop assistant, for want of a better example. This engagement would fail that test, I believe.

By the way, HMRC will accept a PAYE reference of 123/TBC online (3rd party software). I've done it in almost identical circumstances, except the employee was paid net, though never got any payslips or other paperwork. HMRC didn't act on the information provided on the return, as far as I am aware.

My current stance is registration for SA is required (non taxed income needs reporting) but I am still not convinced in which section the income needs reporting.

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By Monsoon
09th Aug 2011 14:25

PennyC

The problem is that they are not self employed. It's not a grey area. Completing the self employed pages when they know they aren't self employed is incorrect. They don't want to be self employed, they just want a job. It just makes me cross that they are being paid a low wage and forced to keep records and pay an accountant, and this guy gets away with shirking his responsibilities.

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09th Aug 2011 14:38

Even the HMRC will tell you there is no tax statute that defines self employment:

The badges of trade are a guideline covered in a number of case law precedents.

Any excuse and the revenue will want your client on self assessment. he can use an SA1 form.

 

He doesnt have to file a CWF1 if he doesn't want to think about his NIC position.

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By Old Greying Accountant
09th Aug 2011 14:45

Why not ...

... incorporate the employee?

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By Monsoon
09th Aug 2011 14:50

Thanks David, that's helpful and focuses the mind.

OGA - for a minimum wage job? I'm trying to save them accountancy fees! :)

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By Old Greying Accountant
09th Aug 2011 15:00

Fair do's, but ...

... you hadn't stated that I think!

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09th Aug 2011 15:01

@Monsoon

I think OGA was just mixing it (I know it is unbelievable that OGA would do such a thing!)   :)

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09th Aug 2011 15:00

Yeah, but....

What about IR35 on incorporation? 

Best way forward (as outlined above) is accept the "employers" word, register for Class 2 NI and then submit earnings on self-employed pages, taking care not to overclaim expenses.  Keep clean and lay low when and if the brown stuff hits the whirly thing all over this "employer".  But isn't it a fact that such persons then promptly look around for someone else to blame?

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09th Aug 2011 15:54

yeah thks keep clean and lay low

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By Old Greying Accountant
09th Aug 2011 15:20

What about "IR35" on incorporation?

So! set up their own PAYE scheme, pay it all through that, but get a 5% write down on income. That way they get their NI credits.

Oooh, Shirley, meoow, just 'cos I don't like Barbra Streisend!

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By Monsoon
09th Aug 2011 16:03

Wooden spoons?

No, who'd have thought it ;-D

Thanks for the input. I'm still not convinced that s/e is the way to go as I still think it would be making a false declaration. I'm going to give them a choice (as of course s/e is easiest and cheapest way to retain NI contributions which is their main concern) and see what happens.

I agree with others I've spoken to that it's not really right for the accountancy profession to condone these false self employments, certainly in cases where it is very clearly employment by any other name. I do of course understand that "the right thing" is often complicated by the fact that people want to keep their jobs and for that reason, these dishonest employers get away with it.

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09th Aug 2011 16:34

No different to CIS

Many CIS subbies should be on payroll, too. The root problem is the burden, and cost, of employing people.

I know in an ideal world there would be enough markup to put people on payroll, but in reality that isn't always the case, especially 'up north' where employers are taking 'break even' contracts, just to keep their workers in work.

As with your client, Monsoon, people are better off with a job, any job, than no job at all. It may, or may not be, the 'employer' trying to avoid NI or giving employment terms. The 'employer' may be struggling and hoping they can keep going in the hope of better times ahead.

EDIT: Sorry OGA!. I forgive you for the Barbra comments, if you'll forgive me for my 'mixing' comments :)

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09th Aug 2011 21:37

I don't use third party software

when the free version from HMRC is perfectly adequate!

Forget incorporation, Wally is quite right. Stay low let others take the blame (as if).

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15th Aug 2011 14:03

Money Laundering report required?

Shouldn't you consider reporting the 'employer' under money laundering regulations, too?

I have similar clients.... who to me appear falsely to be 'self employed'. I help them to file on that basis, warn them about the consequences of an incorrect status and that whilst most of the risk is on the employer for failing to operate PAYE correctly, they may have their 'self employed' expenses challenged and potentially disallowed by HMRC if their status is investigated. Where I can, I dissuade them from 'over egging' their expenses.

And I put it in writing to them when presenting their draft return for signature.

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By Monsoon
15th Aug 2011 14:30

MLR

On the facts available, I would have thought the only MLR report required would be against the "employer." The employee wants to pay their tax so no MLR issues, I wouldn't dream of reporting them, they aren't doing anything wrong.

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15th Aug 2011 15:41

A (first ever!) comment to shoot down?

Is it not possible that the client could declare his income under "Any Other Income" on his tax return and pay Class 3 NI?

PS. I am an ardent reader of the comments section of AccountingWeb for several years (!) and have learned much from it - and am still learning. Thank you all for your contributions.

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15th Aug 2011 17:04

What to do

The correct way to chellenge this is for your client to ask for a statement of his terms and conditions of employment, which the 'employer' is obliged to provide within eight weeks.  If he doesn't, take him to the Tribunal and let them decide.

 

If your client is not prepared to do this, he should accept the self-employed position and fill in his tax return on that basis.

 

You should also file a money laundering report against the employer, who is evading employer's National Insurance.

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By cfield
18th Aug 2011 00:43

Don't forget pension

Another issue to bear in mind here is that if your client registers as self-employed and pays 9% Class 4 NI, they might save a bit on Class 1 employee NI (12%) but their contributions will not count towards State Second Pension or contributions based job-seekers allowance.

Chris

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