Employment tax topics
Employment status is established by reference to case law which has evolved over approximately the past 200 years and is actively continuing to evolve to this day as a result of litigation between HM Revenue & Customs and taxpayers.
Staff who work within your business will normally be employees and may not work as self employed unless you are able to establish that their working circumstances and contractual arrangements with you can legally be established as sub contract.
If you employ staff you need to operate the PAYE procedures and have a PAYE scheme set up. See our Professional Payroll tariff. A scheme is often set up automatically by H M Revenue & Customs following formation of a company. This will generate the need for regular returns even if the deductions are nil. There is a level of tax free pay, 2010/11 £124.18 per week. To qualify for this staff must either give you a P45 for preceding employment or complete a form P46 PAYE: Employer's notice to H M Revenue & Customs Office and be able to state that it is their only job.
Tax inspections and enquiries
According to published procedures, VAT and PAYE inspections can routinely be expected every two years. PAYE inspections HM Revenue & Customs National Insurance Contributions Agency payroll inspections go deeply into the records of the business to discover any untaxed benefits being given to directors, staff or subcontractors including private use within company costs. They can be expected to check entries in directors loan accounts. They also carefully check the status of subcontractors and may assess these for national insurance liabilities. See notes below on status, the same rules, in fact, apply to all employment/subcontractor situations. Annual accounts and Corporation Tax and personal tax returns may be subject to H M Revenue & Customs in depth enquiries. Discoveries in one year will lead to action to assess tax and national insurance in at least the past six years. Penalties (now expected to be about 50% of tax) and powers of inspection at taxpayers premises were increased in the 2008 budget.
Deemed employment under IR35 regulations - Computer and other service contractors
This may arise if a director (or other person) enters into a contract for supply of services through a company.
If all or any of your income relates to a deemed employment under IR35 regulations, PAYE and National Insurance will be payable the following 19th April and form P35 Employer's Annual Return for tax year will need to be made by the following 19th May subject to penalties for late return and interest on tax and NI paid late. As you may know deemed salary is established by a formula I can provide approximate calculations, if required, to help with your cash flow planning, and shall be pleased to calculate the exact liability if you give me the figures when the time comes.
Status - general
Work status depends on the contract in each particular instance. I shall be pleased to help you arrive at a decision about the status of any of your income or of other contractors to the company, however this is a matter for your decision. If you are relying on written contracts to establish status it is important that you are actually working to the terms of those contracts. I advise careful inspection and consideration of H M Revenue & Customs publications. There will be penalties, in addition to interest, relating to later discovery, by H M Revenue & Customs, of underpaid tax and national insurance.
Status - IR35
The only safe thing to do, if you believe your contract is outside IR35 regulations, is to seek advice from the H M Revenue & Customs under the contract referral scheme. Where an opinion is obtained that a contract falls outside IR35, this will be binding on the H M Revenue & Customs. You may wish to take legal advice on such an application and, if so, I shall be pleased to let you know the name and address of a firm specialising in contractor status matters. You can also move forward solely on the basis of independent legal advice in which case you may wish to consider obtaining insurance against the possibility of the legal opinion being challenged by H M Revenue & Customs. All decisions need to be taken on a per contract basis.
Recent cases seem to indicate a general justification for genuine one-man IT contractors being outside IR35. The same base of legal interpretation applies to all trades and professions. You may wish to research reports of decisions in HMRC cases against:
MBF Design Services.
If you are in the construction industry you need to operate the Construction Industry Scheme (CIS) in respect of payments to subcontractors.
Subcontractor includes any person, firm or company who does work for you who is not on PAYE with you. There are monthly returns for CIS which give rise to monthly late filing penalties. If you have both PAYE and Construction Industry Schemes there is also an annual late filing penalty for PAYE.