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Julie Butler considers the possible implications for businesses if they engage workers who are re-categorised from self-employed to employed, under the new penalty regime. 

Introduction

The question of the employed/self-employed argument is a very “old chestnut” but perhaps the diificulty in interpretation of the ‘grey’ areas of the tax legislation surrounding the status of workers is emphasised by the concern over new penalties where PAYE remittances are late. Does the new penalty system indicate that HMRC will take a stronger stance on employees who are incorrectly held out to be of self-employed status? What checks are being made by the employer re: self-employment? Are the “badges of trade” in place for the self-employment? Will the increased complications of PAYE force many small farms (and firms) to take a PAYE short cut such as to treat a worker as self-employed to avoid PAYE compliance? The self-employed status does not just avoid the new PAYE penalty system but PAYE itself including the new requirements to file online, together with all the employment law complications. Will there be an increase in the use of self-employed staff or greater encouragement of self-employed status?

What are the Penalties for Late PAYE Payment?

There is now a system of penalties where monthly or quarterly PAYE remittances are not made on time. This will apply from the payment that was due for the month to 5 May 2010, or for the quarter to 5 July 2010. The level of the penalty will depend on the number of times a payment is late in a tax year. They are as follows:

The penalty will be charged not only on PAYE tax but also on:

• Employers' and employees’ National Insurance Contributions
• Student loan repayments deducted from employees’ remuneration
• Tax deducted under the Construction Industry Scheme

The percentage is of the total paid late in the year excluding the first late payment. So if the remittances for five months were paid late, the penalty would be 2% of the total remittances for the second to the fifth of those months. Where remittances are made quarterly, there will be only four remittances for the year, and so the penalty will be capped at a maximum of 1%.

Further penalties may be charged where any payment is more than 6 months late.

PAYE Penalties and Self-Employed Enquiries

An important point to note is that penalty notices will not be issued until the end of the tax year (April or May 2011). HMRC say that they may issue a warning letter the first time a payment is made late, but they will not be issuing late payment notifications on a month-by-month basis. A liability may therefore accumulate over the year without being brought to the employer’s attention. In addition to the PAYE penalties, the fairly recent changes to the enquiry system from 1 April 2008 of greater penalties all point towards a more vigilant approach by HMRC. It is the employer’s responsibility to ensure that self-employed status is genuine and would survive an HMRC enquiry. Of particular concern is where there is an obvious detail of an employed relationship but the self-employed route is used for convenience.

An example of the above would be farm workers during peak times when clearly there is an employed relationship and the work is just of a temporary nature and not a genuine self-employed status and role. Why not self-employed status instead of employed?

The Complex Default System

With regard to second and subsequent defaults (late payments of PAYE), penalty notices are to be issued, but only after HMRC have ascertained the facts, and only after April 2011. HMRC have stated that all penalty notices will be issued clerically (in other words there will be no automatic computer-generated penalty notices for late-paid PAYE/NIC) and approved by a senior HMRC official before issue. It is understood that where there have been two or more defaults, employers will initially be selected on a risk basis using Accounts Office payment information and other data. HMRC will look carefully into all the circumstances where payment patterns or other information suggest that PAYE/NIC liabilities may not have been settled promptly: this may involve someone from HMRC contacting the employer. As well as looking into the circumstances surrounding second and subsequent defaults, HMRC will also be checking to confirm that the first apparent default, which has been termed the ‘free go’, for which in the case of larger employers a warning letter will have been issued, was in fact a default.

It is considered that there was a time when HMRC took a very understanding view regarding the self-employed who were re-categorised as employed. If the employer would agree to the status changing moving forward, HMRC did not look back but with the new penalty regime will the PAYE inspection be allowed to be so lenient moving forward? In the same way that HMRC are tightening up on penalties on PAYE, small employers could try and escape employment responsibilities via self-employed status.

Action Plan for Employers

There is no doubt that avoiding employed status could be an attractive option for small employers who are feeling swamped by the changes and this could encourage more vigilant checks by HMRC on self-employed status. At a general level it is important for employers to be more careful, for example:

1. Review all self-employed arrangements for temporary/seasonal and general staff.
2. Ensure all the paperwork is in place and that the self-employed arrangement is robust in documentation to prove self-employed status, e.g., a contract for services with a substitution clause for the worker to provide someone to stand in, if the self-employed worker is not available.
3. Review the physical arrangement between employer and service for contract – who gives the instructions, master servant relationship.
4. Review who provides the equipment?
5. Ensure the self-employed worker has adequate insurance in their self-employed capacity?