Tax paid by someone else

Options
Julia Crouch
Julia Crouch Registered Posts: 68 Regular contributor ⭐
I have heard it all now.

Today I took on a new client (a last minute.com) He is self employed in the building trade and works for one person all of the time. By the way he will be paying the £100 fine!

The 'contractor' does not/will not operate CIS or PAYE and pays gross. What happens is that the 'sub contractor' has his accounts prepared and tax liability calculated and then the 'contractor', pays HMR&C directly for the liability. Aparently this has been going on for several years.

Any ideas as to how I should treat the tax payment, a gift or maybe add onto turnover, but that would increase tax that would require a bigger payment to add onto turnover.....Another thought, should I?do I need to accept the appintment?

Any pitfalls that I could come unstuck with, knowing that this is going on?

Julia

Comments

  • JodieR
    JodieR Registered Posts: 1,002 Beyond epic contributor 🧙‍♂️
    Options
    ??!!!

    Well it's the contractor's responsibility to apply the correct treatment to payments - I've checked this several times and the subbie can't be penalised if the conractor gets it wrong. I think you're right that the tax payment should be added to turnover though.

    Do you really need this client?!
  • Dean
    Dean Registered Posts: 646 Epic contributor 🐘
    Options
    Very unorthodox I must admit! The payment isn't income though, so it shouldn't be added to turnover. It would be classed as a loan or something balance sheet orientated but not additional income.

    Regards

    Dean
  • Guest
    Guest Registered Posts: 73 Regular contributor ⭐
    Options
    I would of thought a loan by definition is to be repaid
  • T.C.
    T.C. Registered, Tutor Posts: 1,448 Beyond epic contributor 🧙‍♂️
    Options
    The contractor is presumeably including the tax paid as 'wages' paid to the sub-contractor. As such it has to be part of the sub-contractor's income. If the contractor is paying the tax 'out of the goodness of his heart' and not writing this anywhere in his books, then it is just very nice of him.
    Whatever the case, this is all very dodgy and I would get the subbie to sort it out soon or speak to the contractor yourself.
  • Dean
    Dean Registered Posts: 646 Epic contributor 🐘
    Options
    Guest wrote: »
    I would of thought a loan by definition is to be repaid

    After the rules have been explained correctly, who's to say it's not going to be repaid?

    Practical terms; between agent - client, & client - contractor, if you add this as additional income, as you have said, it'll will increase the tax payable putting you in a position where the client says, "well i've never paid additional tax before" he then goes to get it back from the contractor who won't pay out any additional..... essentailly causing bad feeling all the way round. Tread carefully with this one. You might even be better declining to act.

    Regards

    Dean
  • T.C.
    T.C. Registered, Tutor Posts: 1,448 Beyond epic contributor 🧙‍♂️
    Options
    If the relationship is good between contractor and subbie, surely a polite telephone call to the contractor might sort things out - well at least help.
  • Guest
    Guest Registered Posts: 73 Regular contributor ⭐
    Options
    [if you add this as additional income, as you have said, it'll will increase the tax payable putting you in a position where the client says, "well i've never paid additional tax before"

    So you close your eyes to it???
  • Dean
    Dean Registered Posts: 646 Epic contributor 🐘
    Options
    Guest wrote: »
    [if you add this as additional income, as you have said, it'll will increase the tax payable putting you in a position where the client says, "well i've never paid additional tax before"

    So you close your eyes to it???


    Do you understand the concept of the accounting function at all?



    Like i've said this is a practical problem - you have 9 days until the filing deadline or the client gets a penalty!

    If you include this within income and it turns out later it's something 'other' than 'income' you are wide open for a neglegence claim.

    As Jodie has also said, it is the contractors' problem not the sub-contractors'. You cannot assume that just because the contractor has paid the tax that this is additional income - how is it any different to your boyfriend, girlfriend, husband, wife or bank for that matter lending you the money to pay the tax?

    Regards

    Dean
  • Guest
    Guest Registered Posts: 73 Regular contributor ⭐
    Options
    boyfriend, girlfriend, husband, wife or bank for that matter lending you the money to pay the tax?

    In above bank is different, however if you worked the bank and loan was at a reduced rate or interest free...... BIK ???
  • Dean
    Dean Registered Posts: 646 Epic contributor 🐘
    Options
    Guest wrote: »
    boyfriend, girlfriend, husband, wife or bank for that matter lending you the money to pay the tax?

    In above bank is different, however if you worked the bank and loan was at a reduced rate or interest free...... BIK ???

    Well you've just proved you do not know what you're on about!

    I think me and you should just avoid each other from now on...

    Regards

    Dean
  • Dean
    Dean Registered Posts: 646 Epic contributor 🐘
    Options
    Apologises to Julia for the way this thread has gone.

    I hope you can make use of some of the information provide.

    Regards

    Dean
  • Guest
    Guest Registered Posts: 73 Regular contributor ⭐
    Options
    Beneficial Loan, it is quite common
  • Julia Crouch
    Julia Crouch Registered Posts: 68 Regular contributor ⭐
    Options
    Phew!

    And thank you to you all

    In response, Do I need to take this client on? Well no I don't but I think that I should. My reasoning being that it is not his fault that he works for someone who bucks the system, and I do know that the accountant he came from passed away last year.

    Like all of us he needs to work to earn a living and being closer to retirement sees his options for work closing down (i.e. better the devil you know). He knows that the contractor is a 'bit of a rogue'. Him not me.

    The subbie is not computer or tax return literate and as I do not act for the contractor and I am not aware that he would be liable for the contractors wrong doing then I have accepted the appointment and as Dean points out time is running out.

    His turnover is in the region of £20k, and I did not feel that increasing this was the correct way to go as it is not actually trading income.The only expenditure incurred will be a mileage allowance, some protective clothing and my fee. The guy does not even have a mobile phone.

    There is no balance sheet and so reporting a beneficial loan would be difficult, plus there is not a box on the tax return for one, unless I narrate in one of the white boxes. I think that I will keep a record of a loan on my files, should an investigation happen. And I would imagine that that is just a matter of time.

    Again Thank guys
  • Dean
    Dean Registered Posts: 646 Epic contributor 🐘
    Options
    Guest wrote: »
    Beneficial Loan, it is quite common


    Not in an owner managed Sole Trader it's not! :thumbup1:
  • Guest
    Guest Registered Posts: 73 Regular contributor ⭐
    Options
    the loan isnt from the sole trader to himself its from an employer/contractor.
    Why not get you boss to pay you in loans rather thansalary and therefore in your understanding you would never pay tax.
  • deanshepherd
    deanshepherd Registered Posts: 1,809 Beyond epic contributor 🧙‍♂️
    Options
    I'm afraid I have to agree with 'Guest' here.

    The settlement of a personal debt by a contractor is absolutely trading income. It is certainly not a loan of any kind and to suggest it is similar to being lent money by a family member is, at best, naive.

    My suggestion:

    i) For 2006/07, add the tax already paid (or intended to be paid) on to income.
    ii) Then get the client to settle the additional tax arising.
    iii) Explain the situation to your client and let him know that he will always have this additional liability unless the contractor starts applying the rules correctly.

    Provided your client is correctly declaring his income then it is really the contractors problem and not your clients.

    If your client does not declare the tax paid by the contractor as additional income then he will be underpaying tax and you will then have to consider whether to act on his behalf.
  • Dean
    Dean Registered Posts: 646 Epic contributor 🐘
    Options
    My comments were certainly not made naively, and I refute the suggestion that they were.

    If a contractor pays a sub-contractor gross I fail to see how you can class the tax liability settled by the contactor income. Are you saying the sub-contractor is to raise an invoice to the contractor for his tax liability?

    Regards

    Dean
  • Julia Crouch
    Julia Crouch Registered Posts: 68 Regular contributor ⭐
    Options
    Thanks DeanS,

    'The settlement of a personal debt by a contractor is absolutely trading income'

    What you say makes total sense sense to me. I have changed my mind ( a womans perogative) and will go with what you suggest.

    I was struggling with the way the thread had gone, and the classification of the payment.


    It is really difficult some times.

    Julia
  • deanshepherd
    deanshepherd Registered Posts: 1,809 Beyond epic contributor 🧙‍♂️
    Options
    Dean wrote: »
    My comments were certainly not made naively, and I refute the suggestion that they were.

    Well, I did say naively at best! :001_smile:
    Dean wrote: »
    If a contractor pays a sub-contractor gross I fail to see how you can class the tax liability settled by the contactor income. Are you saying the sub-contractor is to raise an invoice to the contractor for his tax liability?

    Raising an invoice is neither here nor there. There is obviously a verbal agreement between the contractor and the sub-contractor that in return for work performed, the contractor will pay invoices raised gross plus tax arising on those invoices. The payment of tax therefore constitutes part of the agreed 'fee' for the work done, hence income.

    It rarely happens these days but it can get messy if the sub-contractor also works for other people. How do you calculate the tax just on those invoices? Is it marginal or do they get all the personal allowances? But that one is for another day!! :confused1:
  • Dean
    Dean Registered Posts: 646 Epic contributor 🐘
    Options
    It rarely happens these days but it can get messy if the sub-contractor also works for other people. How do you calculate the tax just on those invoices? Is it marginal or do they get all the personal allowances? But that one is for another day!! :confused1:

    That's what I have in my mind and why I wouldn't treat it as income.

    I can see what you're saying though, although i'm affraid this time we'll have to beg to differ :001_smile:

    Regards

    Dean
  • deanshepherd
    deanshepherd Registered Posts: 1,809 Beyond epic contributor 🧙‍♂️
    Options
    You can bring a horse to water..
Privacy Policy