Tag: employment tax

IR35: Is HMRC operating a blanket ban on contractors?

Posted on by Alicia Sprott

Recently, HMRC published its 2022-23 annual accounts. This showed that HMRC engaged 1,096 temporary off-payroll workers – 89% of these workers were engaged by HMRC, 10% by its agency, the Revenue & Customs Digital Technology Services (RCDTS), and the last 1% by the Valuation Office Agency (VOA). Interestingly, 95% of workers were listed as not subject to IR35 off-payroll working (OPW) rules, while the rest were deemed to be within.

So, what conclusion can be drawn from the above data? It does seem to indicate that HMRC is adopting a blanket ban on contractors outside of IR35, something that is considered as ‘not taking reasonable care’ in determining a contractor’s employment status, according to HMRC’s own guidance.

However, HMRC has strongly refuted this by pointing to the continued use of outside contractors. This is supported by the increase in expenditure on consultancies from £1.8m to £5m. Furthermore, HMRC states that “We apply the IR35 OPW rules in the same way as we expect other organisations to, ensuring the correct tax is paid”. This is not the first time HMRC has been accused of operating a blanket ban on contractors outside of IR35. HMRC’s 2020-21 accounts showed a similarly low number of contractors engaged outside IR35 OPW.

Our comments

Aside from evidence suggesting that HMRC is not following its own guidance, the data also raises questions as to how the contractors were engaged if IR35 OPW rules did not apply in 95% of the cases. The only conclusion that can be drawn is that the contractors were engaged via an umbrella company. The umbrella company sector has long been linked to non-compliance and tax avoidance schemes, which is why there is currently a consultation on how best to regulate them. The consultation closes on 29 August 2023.

Considering the above and the legislation containing transfer of debt provisions in event of non-compliance in the supply chain, it will be interesting to see how far HMRC will accept accountability if it gets caught in a supply chain non-compliance/tax avoidance scheme.

The main takeaway from the above is that, although it can be administratively burdensome, you do not have to adopt a policy such as a blanket ban. IR35 can be managed if the company has the right processes, controls, and governance in place. This will outweigh any costs of administration, third party costs, and more.

We have a variety of services that we can offer in relation to IR35. Please contact our Employment Tax team should you have any questions.

Employment tax: Proposed changes to how HMRC collects data

Posted on by Alicia Sprott

HMRC has released draft legislation and a policy paper that proposes changes to the data HMRC requires from employers, shareholders and the self-employed. From the 2025-26 tax year onwards, additional obligations include:

  • Employers will need to provide more detailed information on employee hours using Real Time Information (RTI).
  • Self Assessment tax returns will be required to include:
    • For owner-managed company shareholders:
      • The amount of dividend income received from their own companies separately to other dividend income.
      • The percentage share they hold in their own companies.
    • For the self-employed:
      • The start and end dates of self-employment.

HMRC states that this will improve the quality of data to:

  • Provide better outcomes for taxpayers and businesses
  • Improve compliance
  • Build a more resilient tax system

This also follows the proposals published within the IR35 offset consultation, which proposes engagers retain additional information about the contractors they engage with. This will increase HMRC employer compliance and National Minimum Wage (NMW) reviews, as well as individual enquiries.

The Government also announced that it wants to simplify the process of collecting the High Income Child Benefit Charge (HICBC). It proposes to collect the HICBC via the individual’s tax code rather than the current method of completing a Self Assessment tax return. This will be particularly useful for those individuals whose only income is via PAYE. We expect further details to follow on this but more can be read here.

How haysmacintyre can help

Employment tax compliance continues to be at the top of HMRC’s agenda, and although these rules are not to be introduced until the 2025-26 tax year following the consultation, prevention is better than the cure.

We can check if your employment tax procedures, controls, and governance are robust by undertaking employment tax health checks, and NMW and employment status reviews. Contact our team for further guidance.

Gary Lineker and IR35: Accountancy Daily

Posted on by Alicia Sprott

The story so far

HMRC claimed that Lineker had an amount of £4.9m in unpaid tax from income generated between 2013 and 2018. In an usual move, HMRC claimed that IR35 applied to the partnership Lineker and his ex-wife had in place.

Lineker appealed against HMRC and won his appeal earlier this year at the First Tier Tax Tribunal (FTT). The FTT found that the IR35 legislation did not apply since the contracts were entered into directly with BBC and BT Sport, and not via an intermediary.

Now that HMRC is taking the FTT’s decision to the Upper Tier Tribunal (UTT), it opens up questions about IR35 and the cases in which it can be applied.

Nick Bustin says: “The case magnifies the challenges for those who are responsible for considering the intermediaries legislation, such as medium/large businesses, public sector bodies or workers who are contracted to provide their services to a small business.”

Riocard Hoye adds: “HMRC will be committing lots of resource with the aim of getting the decision overturned by the UTT, to avoid setting a precarious precedent for future tax cases which consider the intermediaries legislation.”

You can read Nick and Riocard’s article in full via Accountancy Daily (subscription needed).

What to do if you think IR35 affects you

Whilst there is still uncertainty around IR35 and its application, the important thing is to remain compliant. Get in touch with our Employment Tax team or our Tax Disputes & Resolutions team to understand how IR35 may affect you and your business.

 

HMRC and the 2019 loan charge

Posted on by Alicia Sprott

Previously, loan schemes, known as ‘disguised remuneration’ (DR), were marketed. DR schemes involved paying employees through loans instead of PAYE, and it was a way to avoid paying Income Tax and National Insurance. These loans were usually interest free, non-repayable in practice and involved the use of Employee Benefit Trusts (EBT) or Employer Financed Retirement Benefit Schemes (EFRBS).

The DR schemes have since been categorised by HMRC as tax avoidance schemes and state they do not work. The government moved to recover lost tax, setting a deadline of 30 September 2020 for taxpayers to reach a settlement with HMRC or repay the loans, otherwise the controversial loan charge would be applied.

The loan charge

The loan charge is a tax charge designed to collect unpaid tax, in relation to the DR loan schemes. The loan charge amounted to tax on the total value of all loans outstanding, as of 5 April 2019, to be declared in the 2018/19 Self Assessment tax return.

When it was first introduced, the loan charge received a lot of attention, including discussion in Parliament, and in 2019 a review into this legislation was commissioned. The review recommended various changes, including spreading the loan charge over the tax years 2018/19, 2019/20, and 2020/21

The loan charge applies to loans made between 9 December 2010 and, either 5 April 2019 for employees, or 5 April 2017 for self-employed individuals.

Following a review, all loans made prior to 9 December 2010 fall outside the scope for Loan charge purposes, as well as loans issued between 10 December 2010 to 5 April 2016, where reasonable disclosure was made to HMRC.

HMRC holds information on those it believes are subject to the loan charge and has been checking tax filings (or lack thereof). HMRC is now acting against those it believes have not properly declared the loan charge, either by not declaring or under-declaring it, in the following ways:

  • Opening enquiries
  • Sending nudge letters
  • Raising discovery assessments for lost tax

Opening enquiries

If HMRC receives a return on or before the filing date, an enquiry can be opened within 12 months. An enquiry can be long running and intrusive and allows HMRC to check the correct tax has been paid in the tax year of enquiry.

However, HMRC is now out of time to enquire into your 2018-2019 tax return, in relation to the loan charge, if you filed on time. This does not mean you are in the clear, as HMRC will open a discovery assessment (see below) or, if you did not file at all, HMRC may be able to open an enquiry.

It is important to note that paying the loan charge does not necessarily resolve the underlying HMRC enquiries for the years in which loans were made. Tax years that are subject to an open enquiry or assessment will still need to be resolved, either by way of settlement with HMRC or, in extreme cases, through litigation.

HMRC issuing nudge letters

HMRC has been utilising a ‘one-to-many’ approach, commonly known as ‘nudge letters’ – this is where the same communication is sent to multiple taxpayers. We have seen HMRC sending nudge letters to prompt those who have not declared, nor paid, the loan charge but should have, according to its records.

This gives taxpayers a chance to disclose the required information before any further action is taken by HMRC, as well as paying any penalties or interest which may be due.

HMRC has been inviting those who may be subject to the loan charge to submit a 2018/19 tax return or to make a disclosure. Whilst not stated as an option on the letter, a professional advisor will be able to assist with further information and guidance, if you believe the loan charge does not apply to you.

Discovery assessment and penalties

HMRC has started to issue discovery assessments to taxpayers who it believes have not disclosed the loan charge, in their 2018/19 tax return.

Discovery assessments are a formal assessment which allow HMRC to collect any loss of tax.

The standard time limit for HMRC to make a discovery assessment is four years, which can be extended to six years for careless behaviour or twenty years for deliberate behaviour.

It is worth noting that you have 30 days to appeal against HMRC discovery assessments, however, if not appealed within the time limit, an assessment becomes final and therefore payable.

Professional advice

If you have received a communication from HMRC, or believe you may fall foul of the loan charge, we recommend that you speak to a professional tax advisor. Communications from HMRC must be taken seriously and you must act quickly to mitigate penalties and interest, where applicable and if possible.

At haysmacintyre, we understand the stress caused by HMRC in relation to the loan charge. We guide our clients through every step of the process, resolving matters in an efficient way, to ensure a clean slate going forward

For any advice or to have a discussion, contact Danielle Ford, Partner and Head of Tax Disputes & Resolutions or Riocard Hoye, Senior Manager.

July 2023: what employers need to remember!

Posted on by Alicia Sprott

Following the end of each tax year, employers need to turn their attention to any reporting obligations they need to meet. From an employment tax perspective, this will include reporting any taxable benefits in kind, as well as notifying HMRC of any redundancy or termination payments where the total package exceeds £30,000.

Benefits in kind

HMRC requires employers to report taxable expenses and benefits provided to employees by 6 July, after the previous tax year has ended. For example, for the 2022/23 tax year, reporting must be done by 6 July 2023.

Forms P11D

Employers are required to report any taxable benefits, for example, private medical insurance cover provided to employees, during the previous tax year. Most of the benefits are reported to HMRC based upon the cost to the employer, which will include VAT. However, there are certain exceptions whereby the benefit is calculated by some other method. The following comments below provide a high-level summary concerning the provision of:

  • Living accommodation
  • Company cars
  • Employee loans

Whilst there are some roles where the provision of living accommodation is exempt, the use of those exemptions is outside the scope of this article.

Living accommodation

The benefit in kind charge is calculated by reference to the value of the property, together with the cost of any improvements which have been carried out. The cost of improvements does not include general maintenance or upkeep of the property. Once the cost of the property has been established, the income tax charge will comprise two parts:

Part 1: first £75,000

The first part considers properties which cost less than £75,000. The charging provision (Section 105 ITEPA 2003) is based upon the rental value of the property, commonly referred to as the Gross Rateable Value (GRV), as of March 1973.

The GRV is set by the Rents Act 1973, but the same principles still apply even though the property may not have been built in 1973. For cases where the 1973 GRV is not available, HMRC has provided some practical guidance  onwhere the GRV can be calculated, by reference to the Net Rating Value (NRV) (which is included on water rates statements) by using a formula:

GRV = (1.2 x N R V) + 32

Part 2: excess value over £75,000

If the property costs more than £75,000, a second layer of charge is calculated in respect of the excess amount, with the benefit being calculated on the basis that it is a loan.

Example calculation

Details               Values/costs Benefit in kind
3 bedroom property £250,000
Basic charge (£75,000) £300
Balance £175,000
Additional tax charge[1] £175,000 x 2% £3,500
Total benefit in kind £3,800
Tax due (say) 40% £1,520
National Insurance (NI) (14.53%) £552

[1] Additional charge is based upon the notional interest rate at the beginning of the tax year.

Regardless of whether any accommodation provided is taxable or exempt (on the basis it satisfies one of the conditions set out above), a benefit in kind will always be due in respect the cost of utilities paid for by the employer. Where an employee is provided with exempt accommodation, the only costs which will also be treated as exempt relate to:

  • Council tax
  • Water charges
  • Sewerage charges

All other utility costs paid for by the employer will be treated as a benefit in kind. For NI purposes, it is our understanding that all the utility bills are in the name of the employer. Consequently, Class 1A NI will be due on the proportion of the costs which are paid by the employer. The Class 1A NI liability will be due for payment to HMRC by 19-21 July, following the end of the tax year (21 July applies where the Class 1A NI is paid via BACS).

However, when the employer is paying or reimbursing any utility bills, and when the contract is between the service provider and the employee, those costs will be subject to Class 1 NI, with the liability (both Primary and Secondary contributions) being due for payment as part of that month’s payroll.

Company cars

A benefit in kind charge will arise on the basis that the car is available for private use by the employee and is calculated based upon:

  • Manufacturer’s list price of the car
  • CO2 emission rate of the car
  • A 3% surcharge applied to diesel cars which are made available to employees

The benefit in kind can be reduced where the employee makes either:

  • A capital contribution of up to £5,000; or
  • A private use contribution which recognises the fact that the car is being made available for private use by the employee.

Many employers have started to provide their employees with electric vehicles, with the attraction being that they can be provided with a low benefit in kind charge. The benefit in kind charge for the 2022/23 tax year, for which forms P11D are due to be completed, ranges between 2% and 15%, compared with fossil fuel rates which can be as high as 37%.

A further point to bear in mind is whether the employer is providing fuel or not. As far as petrol or diesel cars are concerned, when the employer provides any fuel for private use,  a benefit in kind charge will need to be reported based on the following formula:

‘Fixed figure’ x CO2 emission rate for the car.

For the 2022/23 P11D forms, the ‘fixed figure’ is £25,300.

However, electricity is not considered fuel for benefit in kind purposes, which is a further reason why the use of an electric car is proving to be a more attractive proposition.

Employer provided loans (including overdrawn director’s loan accounts)

Employers can provide an employee or director with a loan (including a loan facility) of up to £10,000 before any benefit in charge will arise.

For cases where loans more than the £10,000 limit are made available, a benefit in kind charge is calculated by taking the outstanding loan balance, multiplied by the official rate of interest, less any interest paid by the employee. However, the approach which is more commonly applied is to calculate the charge based on an average of the loan over the course of the tax year.

Please note that where a loan is written-off, the full amount will be taxable but also liable to Class 1 NI, which will apply to both the employer and employee.

Class 1A NI liability

Owing to the various changes to the NI rates, charged during the 2022/23 tax year following the introduction and subsequent cancellation of the Health and Social Care Levy, an ‘averaged’ rate of 14.53% will be applied when calculating the Class 1A NI charge due, in respect of the benefits which are reported on forms P11D.

The liability is due for payment by 19 July 2023, which is extended to 21 July where payment is made via BACS.

PAYE settlement agreements

Employers commonly use PAYE Settlement Agreements (PSA) to help manage the reporting and payment of Income Tax and NI on benefits or taxable benefits where it would be ‘unpopular’ for the liabilities be passed on to the employees.

Items which can be included within a PSA must satisfy one of the following conditions:

  • It is minor in nature
  • It is incurred on an irregular basis
  • It is difficult to allocate the cost to individual employees

Common examples of the type of benefits which are included with a PSA include:

  • Staff entertaining
  • Relocation expenses
  • Staff awards

A PSA is an agreement between the employer and HMRC, and needs to be in place by 5 April in the year in which the benefit is first provided. Enduring agreements are now used, thereby removing the need for it to be re-issued annually. However, it is good practice to review any agreement to ensure it is up to date and, where any changes are required, the employer must contact HMRC before the end of the tax year.

HMRC expects the employer to submit the Income Tax and NI calculations, which are prepared on a grossed-up basis by 31 July following the end of the tax year. The liabilities are due for payment by 19 October 2023.

Redundancy and termination payment reporting

Employers are required to report to HMRC by 6 July, following the end of the tax year, with details of any termination payments, including the on-going provision of any benefits, where the total cost exceeds £30,000.

The information employers are required to provide includes:

  • The total amount of the payments and other benefits awarded.
  • The total amount of the payments made in the year in connection with the award.
  • Details of the non-cash benefits provided in that year in connection with the award.
  • The total number of years in which payments and non-cash payments are to be provided in connection with the award.
  • An estimated total amount of the payments to be made in subsequent years in connection with the award.
  • A description of each of the other benefits to be provided in subsequent tax years in connection with the award and the basis upon which it is being provided.

If employers need to file a report based on the above, it should be submitted to PT Operations Northeast England, HM Revenue & Customs, BX9 1BX.

For further guidance on any of the above, get in touch with our Employment Taxes team.

Eamonn Holmes loses Upper Tax Tribunal appeal over IR35 ruling

Posted on by Alicia Sprott

Within just one week, there have been two judgements relating to the application of the intermediaries legislation (commonly referred to as IR35) involving high profile personalities – Gary Lineker and Eamonn Holmes. It should be noted that while both appeals dealt with IR35, only Mr Holmes’ case reviewed the employment relationship between him and ITV.

Mr Lineker’s appeal was successful due to a technical argument that he contracted directly with BBC and BT, rather than through his partnership vehicle, so IR35 does not apply. His working relationship with either organization was not further reviewed.

Upper Tribunal ruling

In its decision, published on 29 March 2023, the Upper Tribunal confirmed that Mr Holmes’ work for ITV was within IR35. During the pre-April 2021 period, the responsibility to operate Pay As You Earn (PAYE) was with his Personal Services Company (PSC), not ITV.

This judgement can be better understood by looking at why IR35 was introduced, and what criteria must be met for it to be applicable.

Background

People working via a PSC, especially IT workers, was prevalent during the 1990s. PSC structures provided Income Tax and National Insurance (NI) benefits. However, HMRC were becoming increasingly concerned that if the PSC was removed, the working relationship between the end user/engager and the worker was one of employment.

The IR35 legislation was introduced in 2000 with the stated goal of requiring workers to pay the same amount of Income Tax and NI as employees, regardless of the structure in place. It was up to the PSC/intermediary to review the contractual terms of the engagement and determine whether the contract fell within (employment) or outside (self-employment) of IR35. If the contract falls within IR35, the PSC was required to operate PAYE.

In 2017 and 2001, changes were introduced to the legislation for public entities and the private sector respectively, which meant the responsibility for the employment status review was transferred from the PSC to the end client. If the contract falls within IR35, the fee payer (the entity that contacts the PSC) must operate PAYE. There is currently an exemption for small employers in the private sector, where responsibility for the review and if applicable, operation of PAYE still sits with the PSC and not the small end client

Legislation

The key provisions are set out in Section 49 Income Tax (Earnings & Pensions) Act (ITEPA) 2003:

  1. This chapter applies where:

(a) An individual (‘the worker’) personally performs, or is under an obligation personally to perform, services for another person (‘the client’),

(b) The services are provided not under a contract directly between the client and the worker but under arrangements involving a third party (‘the Intermediary’), and

(c) The circumstances are such that if the services were provided under a contract directly between the client and the worker, the worker would be regarded for Income Tax and NI as an employee of the client.

In IR35 cases, (a) and (b) are given and it is (c) that is debated in the courts. However, in Mr Lineker’s case, the Judge opined that the contracts were directly between Mr Lineker and the BBC/BT, and not involving a third party. Consequently, IR35 does not apply.

Holmes’ case

The case was first heard in June 2018 and the current appeal was to decide whether Mr Holmes’ contract with ITV, for the period 2011/12 and 2014/15, was inside or outside IR35. There is a set process which is followed in any IR35/employment status review and this is to:

  • Review the contractual terms of the engagement.
  • Determine how the worker and the client work this contract in practice.
  • Form a hypothetical contract of the actual working terms.
  • Subject the hypothetical contract to the employment status indicators established by case law to determine if the contract is an employment or self-employed contract.

The employment status factors include:

  • Control – what, when, where and how the task is performed
  • Provision of personal service – for example, does the worker have to perform the task himself or can he use a substitute?
  • Mutuality of obligation – does the client have to offer the work, and if so, does the worker have to accept the work?
  • Provision of equipment: HMRC only considers equipment to be significant when it is fundamental to the service provided and sufficiently important to affect the substance of the contract
  • Financial risk: can the worker make a profit or loss?
  • Part and parcel of the client: for example, how well is the worker integrated into the organisation?

Other factors concern the termination notice, payment of any benefits, intention of the parties, length of the contract and demonstrating a business on their own account.

Certain factors carry more weight than others, but both HMRC and the courts state that the employment status should be multifactorial. This has been emphasised again in recent cases involving, Kaye Adams, Adrian Childs and Stuart Barnes.

Factors that determined the Upper Tribunal’s ruling

The three limbs of the Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2QB497 case were satisfied, since there was sufficient framework of control exercised by ITV, there was mutuality of obligation and Mr Holmes had to personally provide his services.

In contrast to recent cases cited above, where being in business on one’s own account carried the most weight, the Judges in Holmes’ case opined that ‘it may seem that Mr Holmes’ work for several organisations points to him being in business on his own account, i.e. self-employed in all of his work. However, the case law clearly establishes that an individual may be considered under several contracts of employment, each accounting for a different period of his or her working week and be self-employed for other contracts.’

Takeaways from the Lineker and Holmes cases

  • HMRC struggles to understand its own legislation.
  • The Judges seem to make different decisions based on similar circumstances.
  • It is important to keep up with case law.

The above and recent cases demonstrate that it is imperative to have robust processes, controls, and governance in place to ensure correct employment status of your off-payroll workers.

Please contact the employment taxes team should you have any questions.

 

 

 

IR35 legislation: Gary Lineker wins tax appeal

Posted on by Alicia Sprott

The amount of Income Tax and National Insurance at stake was in the region of £4.9m, so not an insignificant sum.  Unlike most IR35 cases, HMRC pursued their claim that the ‘intermediaries legislation’, often referred to as IR35 legislation, applied to the partnership which was in place between Lineker and his ex-wife, Danielle Bux. In February 2013, both signed an agreement for the provision of Lineker’s services as a TV presenter, mainly fronting the Match of the Day programme on the BBC. The agreement covered the period 1 July 2013 to 30 June 2016. Further agreements were later entered into by Lineker with BT Sport, under his trading name Gary Lineker Media (GLM) and a further contract with the BBC running between 2015 and 2018.

HMRC contacted GLM in April 2017, requesting details of the partnership income. It was at this stage that HMRC advised they were not enquiring into the partnership’s tax return, but instead asked whether the partnership had considered the ‘intermediaries legislation’.

HMRC raised Income Tax determinations under Regulation 80 of the Income Tax (Pay As You Earn) Regulations 2003 ,for the years 2014/15 and 2016/17, and National Insurance determinations under Section 8 of the Social Security Contributions Act 1999, for the years 2013/14 to 2017/18. The total liabilities being pursued totalled £4.9m.

The First Tier Tribunal found that the IR35 legislation did not apply to GLM because the contracts were entered into directly between Lineker and both the BBC and BT Sport, not via an intermediary. Consequently, HMRC’s appeal was dismissed.

However, it is expected that HMRC will appeal the decision since under IR35 legislation, an intermediary can include a limited company, partnership or individual. HMRC has 56 days to appeal to the Upper Tier Tribunal.

If you have any concerns regarding the application of the IR35 legislation, or HMRC has opened an enquiry into your arrangements,  please contact either Danielle Ford, Head of Tax Disputes, or Nick Bustin, Employment Tax Director, to discuss matters further.

Employment Taxes newsletter – January 2023

Posted on by Alicia Sprott

To start, there’s only two months until the end of the 2022-23 tax year. Within the newsletter, we have listed some tasks you should undertake to remain compliant. See below for the topics covered in this quarter’s edition:

  • Christmas costs: event exemptions and trivial benefits
  • Reduction in Class 1 NI rate
  • Payrolling benefits
  • Changes to company car tax from April 2025
  • Termination payments
  • Intermediaries legislation (also known as IR35)
  • Employment status

To download the full publication, click the link below.

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