Issues for OMBs - employment v self employment , use intermediaries and MSCs Flashcards
Employment v self employment
type of income
Basis of assessment
Income assessed
Alllowable expenses
NIC
Payment of tax and NIC
tax consequences of each. E) employed S) self employed
1) Type of income - E) employment income S) Trading income
2) Basis of assessment
- E) Receipts basis
- S) choice of cash basis (default) or accruals (election) - adjusted profs of tax year chargeable irrespective of accounting reference date
Income assessed
- E) Earnings received from the employment, including taxable benefits for private use
S) All trading profits including adj for private use
Allowable expenses
- E) wholly, exc and necessary incurred in performance of duties of employment
- S) Wholl and exc for purposes of trade
NIC
E) Class 1 primary and secondary, class 1 A and class 1 B
S) Class 4
Payment of tax and NIC
E) monthly via PAYE
S) Self assessment for IT and class 4 NIC, payment by payments on account and balancing payment
S)
Criteria to determine employment status
HMRC will consider
-terms of relationship between individual and person paying for work
-Employee has contract of employment, self employed are contracted for services
Content of contract is fundamental to determining status
following factors:
Degree of control
Mutuality of obligations
Correction of work
Provision of financial capital (i.e. degree of financial risk)
Provision of own equipment
Payment and disciplinary rules
Client portfolio/exclusivity
Integration into the business organisation
Right to substitute an alternative worker
Above is not exhaustive - not a clear decisive test
can check employment status for tax (CEST) - online tool by HMRC
Indicative tool not authorative decision
HMRC will stand by decisions of CEST if answers are accurate
Use of intermediaries Anti avoidance
tax for indiv and intermed
if topco is…
AA leg exists to counteract disguised employment arrangements
aim to prevent tax payers to avoid IT and NIC by acting as if they provide services through an intermediary and not an employee
if AA provisions apply - employment taxes will apply to relevant fees in one of two ways :
1) Employee provide services to company as worker = IT, NIC, EE, ER
2) provide services through intermed. - take div out of intermed
From April 21, if client (topco) is:
Small private organisation = IR35
Public body, large or medium sized private org = off payroll rules (OPW)
Scope of intermediaries leg
The rules apply to ‘relevant engagements’, i.e. where an individual:
a) provides services to a client through an intermediary - is acting as an officer of the company and the services relate to the office
b) would be treated as an employee for the client but for the existence of the intermediary (take into account E v SE factors in list)
then situation is a relevant engagement
if the intermediary :
a) is a company, the rules only apply where the individual controls at least 5% of the OSC
b) Is a partnership, the individual plus his associates must control 60% of the partnership profits for the rules to apply
arrangements using offshore employment intermediaries are also subject to the leg
IR35 - deemed employment payment
When does IR35 apply
whos responsibility
calculation (expenses etc and NIC)
Deemed salary payment to worker
applies where client (topco) is a small private organisation (that is not a public authority).
‘Small’ is defined as meeting 2 of 3 of following:
- Turnover not over £10.2m
- BS assets not over £5.1m
- Avg no. employees not over 50
Group of cos is considered to be one entity for this test
If IR35 applies - application of employment taxes is the responsibility of the intermediary.
Deemed employment payment is claculated as follows (pg 133)
Income from relevant engagements X
Less statut. dedcution 5% (x)
less:
- expenses allowable under (x)
employment income rules
-CA on expenditure by intemed (x)
- contributions by intermed to (x)
registered pension scheme - actual salary/benefits paid to (x)
worker - Employers NIC on actual payments (x)
(see e below) - Gross amount of deemed payment G
Employers NIC on gross deemed payment = G x (13.8/113.8)
Deemed salary payment to worker :
a) Deemed to be paid on 5 April
b) Net deemed employment payment is taxable as employment income on the worker - Subject to IT as non savings income + liable to class 1 primary NIC - Intermed must apply PAYE
c) Gross deemed employment payment deductible for CT in AP it was deemed to be paid
d) Dividends paid out of income which has been taxed as deemed employment payment will be treated as reduced by the amount which has already been taxed
E) Employment allowance is not available to personal service companies
Application of OPW leg
who applies to
calc
treatment for :
Deemed employer
intermed and worker
responsibility for operating the rules typically lies with the client, where they are either:
- A public body
- A large or medium sized private organisation where services are provided on or after 6 April 2021
Client must determine whether contract falls in OPW - may issue a status determination status to worker
Where OPW applies - entity paying fee to intermediary (usually client but may be an agency) must add worker to payroll systems and apply PAYE to a deemed direct payment (DPP)
calculated as follows:
Amount invoiced (exc VAT) X
Less:
- Expenses paid by intermed or worker (X)
allowable under employment income rules
e.g. travel or subscriptions
(optional as need info from worker) - cost of any materials borne by intermedn (X)
and used in performance of services
DPP D
Treatment for deemed employer:
Employment allowance not available to be offset against DPP
DPP deductible for calculating trading profits
Amount paid to intermed will be net off tax (usually using BR tax code)
Deemed employer does not have to enroll worker in a work place pension nor provide benefits
treatment for worker or intermed:
Cash recieved by intermed is not taxable income and exempt from CT
Onward payment to worker is not deductible
Remuneration drawn by worker from the intermed (salary or dividends) will be free of PAYE and NICs up to level of gross DPP - As NIC and PAYE has already been paid by the client
worker will include DPP as employment income on their tax return
managed service companies - what is it
an MSC is an entity which provides services of workers to clients - they then pay out majority of fees recieved for work to the workers.
Worker recieves payments which are more than would have been if treated as employment income paid after deduction IT, NIC and PAYE
MSC arranges contracts, controls bank accounts or clients finances generally
Recruitment agencies and persons providing legal and accounting services are excluded from being an MSC
MSC application of leg
what happens if def met
If def met:
a) Any non exempt employment income paid out to the workers is to be treated as earnings for both IT and NIC purposes and the MSC is obliged to operate PAYE
b) No need to prove the existence of a disguised employment
c) Deemed employment payment will arise on any actual payments made to the workers which are not paid out after deduction of IT and NIC via PAYE
d) payment is chargeable when payments are made
calculation:
Income:
- Amount rec’d by worker in respect x
of services provided by the worker via
MSC which are not treated as
earnings from MSC - Less expenses allowable under (x)
employment income rules
Gross deemed payment G
Employers NIC on G (G x 913.8/113.8) (x)
deemed salary payment to worker x
MSC
recovery of IT and NIC
Interaction with IR35 and OPW rules
Recovery IT and NIC - if NIC and IT due isnt paid by MSC itself - HMRC can seek to recover debt from directors of MSC or MSC provider
Interaction
- where both OPW and MSC rules apply to an arrangement - OPW takes precedence
- Where IR35 and MSC applies - MSC takes precedence
