VAT and employment status

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If you have ever wondered what bearing VAT registration (and the National Minimum Wage) have on employment status you can now find the answer, or part of it. Recent updates to HMRCs Employment Status Manual include the addition of a new chapter: ESM5000.


Where employees act on behalf of their employers, they are not 'taxable persons' and their activities are therefore outside the scope of VAT. If self-employed they would be 'taxable persons'.

Following this HMRC says: "If a trader is chargeable to both employment income and trading income, then only the gross monies earned from the work chargeable under trading income should be considered as being potentially subject to VAT and for which registration may be appropriate."

Exceptions to normal practice:


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By Anonymous
14th Aug 2008 11:52

Off at a tangent
I suppose if the only tool in your box is a hammer, you will aways be looking for solutions that involve nails and hitting things.

IR35 is a problem caused by interposing an intermediary, between worker and employer purely for artificial reasons. This is to save tax/nic for both parties. IR35 merely passes the liability from the employer to the worker. This is at the tacit agreement of both the worker and the business. If the workers did not accept the conditions then it would not happen. Peer pressure is not an excuse, if all workers simply decided not to accept the conditions then it would not happen. IR35 simply levels the playing field and negates the savings made by attempting to convert an employment into self employment by interposing an artificial intermediary. The issues behind IR35 are numerous, and would be rendered useless if businesses employed individuals rather than hired them on a temporary/permanent basis. This would also increase the tax/nic take but would mean the workers would have less take home pay. Subcontractors are to blame as well as employers. IR35 merely reinforces the existing law to encompass changes caused by innovation by employment agencies.

This is not the issue I was alluding to. It merely concerned HMRC PAYE audit teams. They both police Status and NMW. On status determinations they advise it is only effective for tax/nic but not NMW! It is the same people that police NMW!

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13th Aug 2008 12:46

Clouding the issue
@ Iestyn Mortimer.

I don't think I'm clouding the issue at all. You seem to be looking at the issue from an accountant's point of view, whilst I'm looking at it from the point of view of a potential target.

IR35 demands that for "caught" contracts, MyCo is required to pay all its income from that contract, less a small allowance for running costs, as "salary", with the accompanying taxes. As a result of this, the company is not able, or allowed to , accumulate funds to provide "employment" benefits to its employees. Furthermore, the payment of VAT on any turnover over the threshold, is then a collection of VAT on income which has been deemed "employment" income, which as I claim is contrary to the EU directive.

It really is very interesting that the Accountancy fraternity seems reluctant to debate this issue, as do you, let alone challenge the situation legally.

Clouding the issue? I hardly think so!

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11th Aug 2008 17:16

Tax status v's employment status
@ Red Squirrel

"You cannot be self employed for one purpose of the Government and employed for another" - but that is exactly what IR35 does. Considered an employee for tax purposes but denied employment rights. What intrigues me is the total lack of comment on the EU directive which roughly equates to "VAT cannot be levied on any engagement which is employment, or any engagement which by any other definition is employment". This directive should dictate that any individual trading through an Ltd. who collects VAT should automatically not be subject to IR35. However, for some very strange reason, no one has wanted to explore this line of argument.

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07th Aug 2008 18:36

VAT and Employment
It is an established part of VAT law that an employed person is not themselves carrying out an independent economic activity. So any turnover, and tax related to that, is proper to the employer business.

Understandably it has taken time to fully integrate the R and C parts of HMRC together. But well done them on linking the many tax issues on employment together.

Eamon Mc Nicholas
Tax Barrister

[The above is not to be taken nor used as specific advice]

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By Anonymous
07th Aug 2008 10:50

What has always puzzled me concerning HM Revenue & Customs status determinations, is the statement at the bottom of the HMRC letter advising that the decision only applies for tax/nic purposes. It does not apply for NMW etc., This is a cop out as far as I am concerned. Status is not something that can be pigeon holed neatly and it must apply for all purposes not just tax/nic.
You cannot be self employed for one purpose of the Government and employed for another. HMRC police NMW, and it does really concern me that HMRC can provide conflicting advice re status depending on which part of their empire looks at it. Saying that, the PAYE audit teams police NMW, as well as employers and status determinations..Certainly the PAYE teams regard status as part of a tax collection device to raise their targetted yield. They argue for employment but do not follow up these arguments at the settlement stage for NMW considerations of payments made by employers. Certainly suspicious behaviour on their behalf.
I appreciate there are different rules for NIC even for those in self employment for income from certain professions which is outside the scope of the argument

End of rant.

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