My friend runs a small residential surveying business.
He has been paying commission to agents working for local estate agents. The amounts vary but are usually tens or low hundreds of £s. This is apparently a very common practice in the industry.
In July he received a letter, which stated that these payments should be treated under PAYE and the individuals added to his payroll.
He responded by saying that the amounts had been paid after deduction of Basic Rate tax, which was accounted to HMRC, as per a previous agreement, following a previous inspection.
HMRC said they had no record of any agreement and asked my friend for copy paperwork. Fortunately, he was able to locate the paperwork and sent it to HMRC in August.
HMRC's response was to say that the person who had written the letter agreeing to the treatment did not have the authority to make such an arrangement and in view of this and the failure, as HMRC sees it, to comply with legislation, they were demanding tax and penalties, backdated to 6 April 2014. They were not, if he paid quickly, looking to go back to previous years.
My response, as his friend but an accountant who is now some years out of practice and now in industry, was to think that there are several issues here.
1. HMRC's approach, to dismiss the previous arrangement in this way was an abuse of process and should not be allowed to go unchallenged.
2. The previous arrangement seemed to be the most sensible solution to what would otherwise be an immensely cumbersome process.
3. Adding people to his payroll for whom there was no contract of employment and who were only paid occasional ad-hoc sums would appear to be problematic. Apart from the practicalities of obtaining the appropriate details to ensure the correct tax was paid, how would this sit with RTI and pensions auto-enrolment?
What do you think he should do about the process and the issue itself?
Replies (20)
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I would object strongly to any backdating at all, even only back to 6 April 2014.
I would accept the letter from HMRC as notice of termination of the arrangement going forward.
A written agreement sounds like a most reasonable 'excuse'!
I can't imagine that HMRC will get far with this argument. The 'pay up quick and we'll go easy on you', sounds like something out of a gangster movie!
Your friend should only agree to changing to a different system going forwards. He should stick to his guns and ask to use the alternative dispute resolution scheme if HMRC won't budge.
It would be quite fun to ask the current HMRC officer to prove that he has the necessary authority to countermand the previous agreement!
complain
Start the complaint procedure now.
First step is to ask for a review by a senior officer.
How were deductions accounted for?
If not dealt with through PAYE, just how did your friend account for the deductions to HMRC? Where did he send the payments? How did he notify HMRC of the details of the commission agent so that they would be granted credit for the tax? If your friend has simply paid extra amounts of PAYE each month/quarter, presumably there will be an apparent PAYE overpayment.
Does the original letter from HMRC shed any light on why this procedure was implemented.
It seems like it could be a half-hearted attempt to implement a BR Code (PAYE) for these payments?
RTI might be easiest
I am surprised that the estate agents are happy for an independent surveyor to pay commissions to their individual employees, rather than to the firms of estate agents - indeed, I wonder if the firms even know about it. Also, I am far from convinced that these commissions are being paid to "employees" of the surveyor, but I suppose that they are being received by the individuals as a result of their employment, so perhaps should be subject to PAYE.
We don't yet know the basis of HMRC's former treatment of these payments - it might have been more akin to royalties being paid rather than a concessionary form of PAYE reporting.
I agree with John that you should resist strongly the attempt by HMRC to renege retrospectively on their previous treatment. However, it seems to me that the easiest way to deal with these payments "going forward" (please forgive the cliche) would be to run a payroll and report them under RTI.
Negligence
"HMRC's response was to say that the person who had written the letter agreeing to the treatment did not have the authority to make such an arrangement and in view of this and the failure, as HMRC sees it, to comply with legislation, they were demanding tax and penalties, backdated to 6 April 2014. They were not, if he paid quickly, looking to go back to previous years."
Are not HMRC responsible for the actions of their employees?
It would appear reasonable to me to assume that they ought to be.
Whether or not the employee had authority to agree to the arrangement as he held out he did, presumably on his employer's stationery, any reasonable person would accept on receipt of such a letter that the position proposed by the member of staff of HMRC was binding on HMRC. If HMRC are liable for the actions of their employees, and if they are not denying the letter from their employee exists, then surely your client would have a right of recovery from:
a. the employee, as an individual
b. their employer
for any economic loss your client suffers, which no doubt would include penalties, interest and professional costs as the letter, if not binding, is surely negligent.
Accordingly pointing out to HMRC that any penalties etc due by tax statute will likely be subject to legal action against HM Government by your client for negligence may persuade HMRC to take a more pragmatic view of the matter.
Or is HMG immune from actions for negligence?
Maybe Judical Review is the correct process
DJKL,
I think HM Govt is offered some protection as they are acting on behalf of the Crown but nonetheless, I agree with your basic premise. I shall make that point to my friend once I have found out more following the other good advice received.
It may be Judical Review is the correct process, albeit there appears to be some changes in the right to seek JR in the offing at present.
Good luck with your efforts.
You can also point out to HMRC that if agents/ taxpayers cannot rely on communications from HMRC being honoured, because of fear the member of staff signing does not have capacity, then nobody will be prepared to enter into any agreements with HMRC in future which may make running HMRC a little tricky.
Taxed Award Scheme
It appears to me that the payments should be treated in accordance with the Taxed Award Scheme.
https://www.gov.uk/expenses-and-benefits-third-party-awards/what-to-repo...
It will certainly be a bureaucratic nightmare! Your friend must pay the tax and the recipient's employer must pay the NI.
Get the agents to invoice
I work in the same industry. We don't pay any money to individuals, we pay it to the Estate Agency after requesting that they send us a VAT invoice. So we avoid all these payroll issues.
Contract law
Do I correctly remember that a contract is valid if the person making it had apparent authority to do so, even if they subsequently are found not to have had actual authority to do so? In which case the original HMRC officer's apparent authority would be sufficient to make the contract binding, up to the point of the current termination??
Contract law
Do I correctly remember that a contract is valid if the person making it had apparent authority to do so, even if they subsequently are found not to have had actual authority to do so? In which case the original HMRC officer's apparent authority would be sufficient to make the contract binding, up to the point of the current termination??
Ask HMRC
why they consider these payments subject to PAYE as the surveyors are clearly not employees of your client and to provide their statutory. regulatory or judicial authority for their views.
State that you will then be taking independent advice with a view to appealing against any assessment HMRC intend raising and asking for it to go firstly to review, the ADR and, if still not satisfied, to be heard by the First Tier Tax Tribunal.
As for the agreement not being valid, write a formal letter of complaint to the Inspector dealing with complaints at the office concerned and send a copy to someone on the Board of HMRC, pointing out that you are horrified at an employee of HMRC being authorised to write letters but being allowed to exceed his authority in this way.
I cannot promise this will do much good in settling the matter but it should me you feel a lot better afterwards