Sarah disclosed that she had been approached by a potential client who had been self employed since April 2006 in her query of 4 December 2007 [1].The individual stated, initially, that he had not paid any tax on the self employed earnings or Class 2 NIC.

The client wished to file a tax return for 2005/2006, when he was employed, in order to obtain a tax repayment, and then file in-time tax returns for 2006/2007 and 2007/2008.

The client is a trainee plumber and he had minimal records. It appeared that income in 2006/2007 was about £3,500, with anticipated income in 2007/2008 expected to be about £8,000.

The individual must be working part-time on day rate jobs at the NMW development rate. He should probably be registered under the CIS scheme. As a result of this, should the contractor paying him gross be reported to SOCA? Sarah assumed not, as the contractor is now dealing with tax deductions.

It appears that the potential client had never registered self employed with HMRC. The HMRC website talks about a £100 fine if registration does not take place within 3 months. Does that increase with time? Is ignorance of obligations a defence in such circumstances? For NIC purposes the earnings for 2006/2007 are less than the small exception limit. Sarah assumeed that this can be claimed retrospectively, with payments under Class 2 NIC commencing in 2007/2008.

The individual recognised that he is likely to pay penalties and interest, and just wanted matters sorted out.

Mehmet Mehmet considered that there would be just one £100 fine, as there was no tax to pay in 2005/2006 and 2006/2007, the later year's income being covered by the personal allowance.

Clint Westwood observed that an individual may claim exception from Class 2 NIC Contributions in a year on Form CF10 on the grounds that income is below the exception limit. Strictly the application should be made in advance based on estimated earnings. In practice, although technically in default, Clint has found that an application in arrears, supported by a statement of historical profits confirming the de minimis figures, is invariably accepted. The plumber could therefore escape Class 2 payments for 2006/2007, but it should be remembered that non-payment of NIC Contributions will affect contributory State Benefits, such as the State Pension.

Clint agreed that, because the plumber will not benefit from NIC exception in 2007/2008, then he will not escape the £100 penalty. Had he registered before 2007/2008, even outside the 3 month limit, then, in Clint's experience, he would probably have escaped the penalty, although technically in default. He has also encountered cases where no penalty has been charged where the Form CF10 accompanied the CWF1 for the previous year. One cannot bank on this.

The plumber might also have been potentially liable to an income tax penalty for late notification of an income tax liability (deadline 5 October 2007 for year 2006/2007), although on the basis of limited information it may be that income was covered by the personal allowance. Even if there was a tax liability, submission of an unsolicited tax return with tax payment by 31 January 2008 would solve that problem.

Clint also observed that if the potential client had fee protection insurance, then he would not be covered for fees because he is technically in tax default, even if no tax penalty is imposed. Finally Clint hoped that the individual was claiming Working Tax Credit – if not application should be made immediately.

In my view Sarah had to decide whether or not she wanted to take on this client. There is a substantial amount of work to do, the client is not wealthy, and the potential client should be made aware of the likely fees at the earliest opportunity.

Of course ’little acorns can grow into oak trees’ and I recollect the case of a subcontractor client who fitted the Artex ceiling to the only new house we ever owned. He later became a builder and developer, and is possibly retired now.

If Sarah does take on the client, he must be made aware firmly of the obligations and regulations regarding self employment. A proper bookkeeping system must be instituted in order to comply with section 12B, Taxes Management Act 1970, a business bank account opened, and a tax reserve operated to fund half yearly payments of tax. As well as details of income, receipts for payments should be kept.

Proper records will then produce the potential for claims for motor & travelling, possibly use of home, and business telephone calls. But the client must be made sure that he is 'in business'. If not he should become employed, with all the employment law advantages.

This is not my territory, but I do not think that a report to SOCA would have been necessary in this case.