Employment status, Demibourne and National Insurance Contributions There have been many commentaries on employment status and everybody that is involved with determining an individual’s categorisation for Income Tax and National Insurance Contributions purposes is well aware of the complexities caused by the limited Statutory guidance, extensive Case Law, and voracity of Revenue Inspectors to make virtually all service providers become employees. It is also well known that the driver for this can often be due to the increased National Insurance Contributions rather than the Income Tax potentially chargeable. I, too, have commented on status issues in the past but this short article is not concerned with employment status itself, but the consequences of collecting additional Tax/NIC once that status has been determined. The Demibourne case (Demibourne Ltd v Revenue and Customs UKSPC SPC00486 (23 June 2005)) caused everybody to start to rethink their views for collection of liabilities when the case was heard in 2005, just over three years ago. Up to that point, Revenue Inspectors (and advisors) were generally comfortable in offsetting Tax/NIC paid by the service provider under the selfemployment rules against the PAYE liabilities from the recategorised employment. As the deemed employer was usually the payer of the liabilities, this was often welcomed as it went a long way to reducing additional liabilities, particularly Income Tax, and possible interest charges and penalties. Demibourne confirmed that, in fact, the Revenue did not have the necessary discretionary powers to do this offset for Income Tax purposes. This potentially produces a situation where the service provider, who has been recategorised as an employee, could obtain refunds of the Income Tax paid in a selfemployed capacity (by making “Error or Mistake” claims under S33 Taxes Management Act 1970) whilst the deemed employer suffers a PAYE Income Tax liability, without recourse to the recategorised individual. Although the Revenue won the status case and accepted the decision regarding its lack of discretion concerning offsets, it did not want to risk alienating the deemed employers who would, naturally, feel aggrieved at settling a tax liability whilst the individual, or individuals, concerned received a repayment of tax. The position could be aggravated further if the employer was required to pay for years “out of assessment” and thus barred the individual from obtaining any refund. It was common practice prior to Demibourne for the Revenue to offer, in return for an informal settlement, to do the offset so as to avoid paying tax twice on the same earnings. Indeed, the sentence “Please note that it is not Revenue practice to charge tax twice and any tax already paid on the employees earnings will be taken into consideration” was an acceptable part of a PAYE compliance officers vocabulary. It has therefore taken nearly three years from the Special Commissioners decision for the Revenue to think about what to do, put appropriate legislation into place, and then provide guidance to employers and advisors. In the meantime, an interim practice of asking the individual concerned to relinquish his/her right to a refund in
favour of offsetting liabilities found to be due under the employment. Although I am not personally aware of instances where the individual refused to give up the refund, I am sure that this happened and caused issues for the deemed employer, particularly in instances where the individual no longer provides services to that organisation. Clearly, this issue had to be resolved and, despite the elapsed time, the new legislation, which commenced on 6 April 2008, takes away the potential problems and, in many respects, puts everything back to where we all thought it was prior to 2005. The legislation contained in the Income Tax (Pay As You Earn) Regulations 2003 has now been amended to include Regulations 72E and 72F to allow the Revenue to make a direction to transfer part of the deemed tax liability to the employee. Although the legislation is written in terms of transferring the liability, the amount transferred cannot exceed the tax paid on the “relevant payment”, ie, the amount of income received by the individual from the employer and included, or to be included, in a SelfAssessment as selfemployment earnings. There are a number of conditions and restrictions as to the operation of the amended rules, including no earlier agreement prior to 6 April 2008 but, for most purposes, the change effectively offsets the PAYE liability by tax paid under SelfAssessment. So, good news all round? Yes, apart from the fact that individuals may have been incorrectly recategorised, deemed employers suffering excessive liabilities due to this, competitive inconsistencies within industries, and administrative issues for everybody concerned. However, that is a tale for another day. A further potential issue is that the Revenue will deal with the transfer of the liability only after the full liability has been accepted. At that point, the Revenue will advise the Employer that there MAY be scope to relieve some or all of the liability and will consider making a direction against the employee. The employee may appeal against that direction but the employer cannot. Also, the employer cannot be given details of the tax paid under SelfAssessment and must, therefore, accept any offset given by the Revenue. Finally, as far as the offset is concerned, this will not reduce the figure on which penalties are calculated. For technical reasons, the Revenue considers that penalties should be chargeable on the full PAYE liability, ie, before any set off, despite having had the tax from the individual for some time, possibly years. This may prove to be particularly distasteful to deemed employers, particularly if they do not agree with the recategorisation but merely accepting it because the costs of assessment, appeals, Commissioners and beyond are prohibitive. The Revenue is being encouraged to operate a “light touch” here and I am certain that accountancy and taxation bodies are looking closely at the legislation and guidance to ensure that deemed employers are not unnecessarily penalised for something that, for many, is a very difficult and subjective area. Despite the position for penalties, the Revenue will only charge interest on the balancing tax payable after the setoff.
And where does this leave National Insurance Contributions? A point from Demibourne which may not have been immediately apparent is that the discretion not afforded to the Revenue for Income Tax purposes is given as far as NIC is concerned. So, in many instances, particularly where the tax differences are low or nonexistent, any additional Class 1 (Employers and/or employees) NIC could, and still can, be offset by Class 2 and/or Class 4 NIC paid by the individual. Regulations 51 and 101 of The Social Security (Contributions) Regulations 2001 continue to allow the Revenue to offset Class 2 and/or Class 4 NIC respectively if they have been paid in error. Although the right of setoff is restricted to primary (Ie, employees) Class 1 NIC payable by the deemed employer, this is unlikely to be an issue as the level of employees NIC is always going to exceed the contributions paid by the individual in a selfemployed capacity. Ken Voller ATT is a tax and business adviser and can be contacted by telephone on 023 8090 6534 or by email: ken@taxbusiness.co.uk