For those of you have been to any form of employment tax seminar in the past two years, you will undoubtedly be aware of the Demiboure tax case.
I will not bore you with the facts at this time however, one of the outcomes of the case was that it was found that at HMRC did not have the discretion to offset tax paid by the employee ( newly classified ) against those now due from the employer.
This meant that where a self employed individual was re-classified as an employee, and as such subject to PAYE, the employer was liable in full for all of the tax that should have be deducted throughout the duration of the engagement. The newfound employee, having paid income tax via self assessment, would then find himself/ or herself with a sizable tax refund due in relation to the tax already paid on the same income now underassessment by HMRC.
This decision had massive implications for employment status reviews as the financial consequence of losing the argument with HMRC could be devastating.
As the case itself was heard before April, 2006 it also had a significant implications for the construction industry schemes monthly filing requirements (CIS300), specifically regarding the declaration concerning employment status.
For employers at risk i.e. any organisation engaging with self employed individuals, not via a limited company, on a regular basis, you will be glad to note that with effect from 6th April 2008 that has been a change in legislation.
Following the amendments (The income tax (PAYE) (Amendment) regulations 2008 SI 2008 No. 782) there is now scope for HMRC to transfer part of the employer’s liability to the employee (newly reclassified). The transfer of liability will be limited to the tax previously settled by the employee via self assessment on the income paid by the employer.
For example if the employer had provided the previously self employed individual with £10,000, worth turnover, which after expenses and other deductions resulted in a tax bill of £1,000, duly settled by the newfound employee, the maximum transfer of liability will be £1,000. The employer will remain liable for any excess PAYE which now arises.
Where a direction of this kind is made the employee retains the right to appeal to HMRC against the transfer of liability. For this reason we have a new type of letter of offer concerning employment status based reviews.
Under normal circumstances, when HMRC issue a letter of offer it forms an invitation for a contract settlement i.e. HMRC have outlined how much they would be willing to accept to bring the review to an end, excluding interest and penalties. Where an employment status direction is likely a new type of letter of offer referred to as a “Trigger” letter of offer will be issued.
Unfortunately before a Trigger letter of offer can be issued the employer will need to accept that PAYE is due on the payments made to the previously self employed individual. As the employer therefore, you will have accepted the full PAYE liability and have to hope that the final settlement is reduced by HMRC’s by redirection of some of the liability against the tax already paid by the employee.
This will of course exposure your organisation to increased risk as you will be accepting a liability not necessarily knowing by how much the liability will be reduced by the employees previous tax settlements.
Due to the uncertainty of this arrangement we would still advise that prevention is far better cure. Making sure that all your engagements with self employed individuals are done in such a way as to minimize the likelihood of a successful reclassification by HMRC is by far the best way to reduce your businesses overall risk.
If you’d like any additional assistance in this area then please do feel free to contact any of the team here as we will be glad to help.
