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Can an employer enforce employee to pay ER NIC's?

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I have a client who is employed in esports. For those that are unaware this is electronic sports - professionally. He is employed and on a very good salary of roughly £50,000 GBP per year. His team are the best in this particular esport making up to 5x that in tournament winnings.

Tournament winnings are usually paid 3-6 months after the tournament. He has therefore just received monies from the tournament he won in February. The way this works is that the tournament administrator pays his organisation and his organisation pay it to him via his salary. 

The issue is, is that he has been deducted out of the gross pay the employers NIC value of ~£9k. Upon his investigation into his contract that he has signed, it states "The player shall receive earned prize money as a gross amount less taxes and social security contributions payable by the employer, subject to the follwing conditions" 

The conditions set out are met, and I can't go into them. However I was wondering around the legatlity of such a clause in the contract under UK law. The employer is a german based organisation and the remainder of the team are also non-UK but are from numerous countries, France, Sweden, Finland etc but will be facing the same issue - so should anyone have any personal tax knowledge of those countries, input from that would be appreciated. 

Replies (22)

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By Tim Vane
03rd Sep 2019 21:05

Perfectly legal if done correctly. The employer is responsible for paying the 1A but are merely factoring it in as a hidden service cost to the employee.

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A Putey FACA
By Arthur Putey
04th Sep 2019 09:29

If he employer is a German organisation, how does a UK NI liability arise, do they have a UK PAYE scheme? Where is it considered the employee performs his duties?

But generally it seems that the employee wins the prize money on behalf of their employer who then pays them a salary after taking their profit. Semantics perhaps but the NI is not a deduction from gross salary. If the amount available for payroll is £50K and e/er NI is £9K the gross salary for PAYE is £41K.

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Replying to Arthur Putey:
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By Tax Dragon
04th Sep 2019 09:51

It's not semantics. It's a really good point. A bonus of £41k and a bonus of £50k are two very different things. Just ask the taxman.

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Replying to Arthur Putey:
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By Fresh
08th Sep 2019 20:00

So the employee is put through a UK payroll agency -

Whats happening is its essentially a hidden service cost. So say bonus is £50k thats taxed accordingly and there is then a 9k deduction from net pay that the employee pays to the employer to neutralise their NI cost on it

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Replying to Arthur Putey:
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By Fresh
08th Sep 2019 20:00

So the employee is put through a UK payroll agency -

Whats happening is its essentially a hidden service cost. So say bonus is £50k thats taxed accordingly and there is then a 9k deduction from net pay that the employee pays to the employer to neutralise their NI cost on it

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Replying to Arthur Putey:
By coolmanwithbeard
09th Sep 2019 11:00

Does the employer have any other staff or any other presence/establishment in the UK? If not then 1A may not be due. If your client is the only staff member surely he can run his own payroll width a DC scheme where there is no 1A paid at all only employee contributions.

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Replying to coolmanwithbeard:
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By Fresh
09th Sep 2019 11:12

There are other UK employees as far as I am aware.

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By Justin Bryant
04th Sep 2019 11:50

Employers are liable for secondary Class 1 NIC under s1(2)(a)(ii) and s6(4)(b) Social Security Contributions and Benefits Act 1992 in the link below.

http://www.legislation.gov.uk/ukpga/1992/4/pdfs/ukpga_19920004_310518_en...

Secondary Class 1 NIC can only ever be recovered by an employer from a director/employee under s121C Social Security Administration Act 1992 per the link below:

https://www.taxation.co.uk/Articles/2012/06/20/290601/recovery-position

Under section 6 and para 3A Sch 1 SSCBA 1992 the liability for ERs NIC is the employer’s only and this cannot be shifted to the employee (in the absence of any specific legislation such as that referred to above or a PLN).

Of course, none of that prevents it being commercially agreed between the parties that the employee (and not the employer) should bear the economic cost of all NICs (including ER NIC) via a reduced salary etc.

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Replying to Justin Bryant:
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By Tax Dragon
04th Sep 2019 11:59

Justin Bryant wrote:

Of course, none of that prevents it being commercially agreed between the parties that the employee (and not the employer) should bear the economic cost of all NICs (including ER NIC) via a reduced salary etc.

One of your more sensible edits.

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By petestar1969
09th Sep 2019 10:08

This happens with the agency companies that "employ" workers who work on the railways so the train companies don't have to employ them direct. The partner of one of my friends works this way through Cleshar and had the employers NIC deducted from his pay. Bit of a pisstake if you ask me.

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Replying to petestar1969:
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By Justin Bryant
09th Sep 2019 10:29

Well, they should ask them to refund it and if they don't they should make a court claim for this (that they would win due to the above legislation preventing this).

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Replying to Justin Bryant:
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By Fresh
09th Sep 2019 11:14

Which legislation exactly? I understand this is a grey area and essentially the employee is being legally contracted to pay a service charge equivalent to the value of the ER's NIC. Personal Tax/NIC's definitely isn't my area of expertise/experience

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Replying to Fresh:
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By Justin Bryant
09th Sep 2019 11:33

The legislation in my above post! A court will not be fooled by labels if the substance is that the so-called service charge is merely an artificial means to wrongly deduct/recover ER NIC from the employee.

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Replying to Justin Bryant:
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By Fresh
09th Sep 2019 16:54

Sorry didn't see your references. So what would you do - would you approach the employer directly to recover?

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By ds
09th Sep 2019 11:17

Could the client set up as a Limited Company and pay the tax, NIC and dividends as he sees fit to reduce these deductions? Also how are currency conversions handled?

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Replying to ds:
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By Fresh
09th Sep 2019 11:48

Unfortunately not - this would be the ideal for my client but given its esports, there are certain issues that the employer in this case has issues with - mainly to do with image rights/sponsorships etc. Whilst it would be possible for him to do it as limited company or even self employed sole trader, it would become infinitely more complicated for his "employer" - or so they say.

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Replying to Fresh:
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By ds
09th Sep 2019 15:50

I wondered if the "employer" as based in Germany is actually paying over the NIC and IT over to HMRC and not pocketing the lot himself. I should have thought rights issues are a separate matter to payment and those can be sorted by a suitable contract. I don't see that e-sports should be any different to other entertainment industries where the talent is paid by various tax avoiding measures to maximise earnings.

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By badgmalt
09th Sep 2019 14:14

Justin Bryant is quite correct in his references. Not only that, but you'll find it repeated in ITEPA Sch 10 (the off-payroll rules) and HMT have been explicit in stating that employers cannot collect secondary contributions from employees under these rules (writing to MPs elicits the response). By the way ITEPA Sch 8 (so-called IR35) takes a different perspective on this topic, suggesting that secondaries can be deducted in this way

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By rbw
09th Sep 2019 16:52

If the contract is drawn properly it seems to me merely the converse of employees who have a right to a sum net of all deductions, leaving the employer to "gross up" for tax and NICs.

Looked at that way, I think it is unhelpful (not to say wrong) to state that "The issue is, is that he has been deducted out of the gross pay the employers NIC value of ~£9k". He was never entitled to the gross amount. He was entitled to pay of X where X + (taxes and social security contributions payable by the employer on X) = the gross prize.

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Replying to rbw:
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By ds
09th Sep 2019 17:37

The employer has behaved more like an agency and has deducted both sets of NIC from the total. If the client was aware of this at the start then no problem if he is happy. I just wonder if the employer is pulling a fast one and hiding behind rights issues to avoid paying the client gross. As long as the client guarantees he is liable for all local taxes then the employer has little to worry about. The client may be best advised to look for another deal somewhere else.

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Replying to ds:
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By Fresh
09th Sep 2019 17:50

The employer pays monthly NIC's on salary as per normal. This is a specific issue arising solely on the payment of winnings

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Replying to rbw:
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By Fresh
09th Sep 2019 17:49

I think i worded that poorly.

The employee has received net pay of

Gross pay - PAYE - EE's NI - Ers NI = Net pay received

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