PAYE exposure on casual labour

PAYE exposure on casual labour

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I was involved in a deal recently where a company had failed to apply PAYE and NI correctly to payments made to casual workers. The company’s tax advisers computed the potential exposure by applying a rate of 45.8% (total PAYE and EEs and ERs NI) to the amounts paid to the workers, as shown in the P+L account:

Eg paid to worker and shown in P+L 100. Tax exposure = 100 x 45.8%

and then adding estimated interest and penalties on that amount of tax.

I asked them whether the amount paid of 100 should be grossed up by PAYE and EEs NI to arrive at the hypothetical tax that should have been deducted, then applying ERs NI to that much higher grossed up earnings figure and computing interest and penalties on the much higher total PAYE and NI.

The tax advisers said that it was not normal for HMRC to gross up in these circumstances and that 45.8% of the P+L figure (and interest and penalties) was the maximum exposure of the company.

Are the tax advisers right?

I would be grateful for the advice of any PAYE or other tax investigations specialists or anyone at all actually!

Thanks a lot to anyone who takes the trouble to reply.

roger rabbit

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By stephenkendrew
06th Jun 2007 19:04

it depends!
The payments could be either gross or net...

HMRC manual (ECH19005) –

"Tax free payments to employees may be ‘gross’ or ‘net’ payments.

Gross payments are where the employer has failed to deducted PAYE tax from them.

Net payments (or ‘free of tax’ payments)are where the employer has an agreement with their employees and
intends to bear the tax on behalf of the employee
considers the payment to be an amount after deduction of tax."

In your case I suspect there is no such agreement, in which case the tax advisers would be correct.

I should also point out that whilst tax at 22% will be applied to the full amount of the payments, NI shouldn't be - the first £100pw at the moment is free of NI even if the worker has another job.

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By User deleted
07th Jun 2007 10:35

Gross up
It is a number of years since I have had to deal with an adverse PAYE audit but when I did the revenue applied grossing up.

In more recent years I have come across PAYE complience problems when doing due diligence work for clients looking to buy a company. When quantifying the risk I have always applied grossing up.

If going into bat with HMRC you might start by not using grossing up but don't be surprised if they don't go along with you. After all the amount the casual has had will be the net if the employer pays the PAYE and NI.

In an employed versus self employed dispute there is a clear intention that the amount paid to the person of disputed status should be the gross amount so there is a clearer argument for not applying grossing up

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By User deleted
07th Jun 2007 17:21

Thanks to both
Stephen and David for your helpful comments.

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