Income tax problem - UK?

Question

I am an employer. We have been paying Mr X [who should really be classed as an employee] as if he were self employed.

I am aware that if I do not pay his tax at the correct time under PAYE I am still liable for it but I have confirmed that he does record his income from me in his books and pay the tax as self employed. The position has never been clarified with HMR&C.

In practice the amount of tax actually paid on what I pay will be the same and in fact he may of paid too much NI!

Overall is there any problem for me? Will the revenue insist that I pay PAYE and refund him? The amount is not huge - possibly about £500 tax over two years.

Answer 1

If HMRC decide that he is your employee, then you are liable for the tax and NIC which you should have deducted. You would pay this to HMRC and has nothing directly to do with him. A recent tax case confirmed that this is the case, even if he has declared his earnings as self employed and paid the tax - you do not get credit for this.

Therefore essential that you sort out his status with your local status Inspector before long.

Answer 2

Mr x would have to meet certain criteria to be classed as self employed, things like;

Does Mr x chose his own hours or do you chose them?

Does he use his own tools or your tools?

Has Mr x registered himself as self employed with HMRC?  (he would have needed to do that within one month of starting)

Does he recieve and fill in a self assessment form each year?

Does he have the right to regularly refuse work he does not want to carry out?

Does he work for anyone else other than you doing the same job?

Does he have his own client base?

Is he responsible for his own marketing?

How many days per year does he work for you? etc.

Questions like this the inland revenue will ask to determine his tax status.

You say yourself he should be classed as employed.

You need to be paying employers NI @12.8% for him as well over the past two years.

Take advice from them, they are helpful but if you leave it go they will make you pay it all back.

Answer 3

Have a look at booklet IR56. It gives help in deciding whether employed or self employed.

http://www.hmrc.gov.uk/pdfs/ir56.htm

If you conclude that Mr x is an employee, you should contact the HMRC office dealing with your PAYE. Just explain the problem to them. They much rather people come forward than wait to be discovered!! The individual will prob be issued with an SA Return to determine any liability for the year however, the amount you say is not alot so the loss to HMRC isn't great.