Self-employed, employed or other?

sabinanelke

Hello,
I hope somebody can help me with the following.

I am coming across more and more clients, who are self-employed, but work for somebody else as sub-contractor (not CIS sub-contractors) and their contractors are deducting tax from their payments. When I ask them, if they are treated as employees for tax purposes, they say "no". They receive no P60's or P45 when they move on. Although they have the tax deducted by the contractor (the next one I am about to meet had it deducted at 22%), they still pay Class 2 NIC as normal self-employed people do.

I thought that there are only two options for tax purposes: somebody can be either employee or self-employed. Am I missing something? Is there a third option? On what basis are the contractors deducting and paying HMRC? And what about the tax already deducted from the sub-contractors' payments? On the SA103, there is only an option for CIS sub-contractors to enter their total deduction. My worry is that without stating the tax already deducted on the tax return, HMRC will treat it as tax still to be paid.

Very confused at the moment, but I am sure there is a simple explanation.

T.C.

All sounds very dodgy to me. If not CIS, then what?

payrollpro

Not so uncommon I'm afraid. I am doing a job for a client where I have been forced to put a number of "traders" through payroll because of my very severe worries that they will not declare the income and my client will get hit by a status claim. One trainer gave me such a load of guff about how she was registered that I knew she had no intentions of declaring the income.

To me, too many sole traders fail to make their business look like a business and their actions, contracts and invoices are so amateur that their clients are forced to withhold something akin to tax and NIC in order to protect themselves from status attacks by HMRC, still one of the most lucrative compliance activities for them.

It is a huge problem for payers and they can actually create more problems for themselves using payroll or pseudo CIS methods, but at least, they say, they cannot be hit and the trader can put the withhold sums through as tax paid already (if they remember to do so) so no one loses.

What I would like to see is a change in the law which forces sole traders to create a trading name and to have business bank accounts. That's not going to happen, not in my lifetime, so we are stuck with the problem of proving to a client that the trader is a true trader.

As long as HMRC sees users of our clients services as a cash cow they will continue to assess them as non compliant, refuse to offset tax the trader may have paid under the Demibourne rules, and leave our clients out of pocket.

It is for this reason that so many will use payroll to pay them, which is completely wrong, or to impose arbitrary withholds in the way you have seen. To me the only way out is to encourage your clients to use a trading name and not their own name or to incorporate. That brings them into the deemed employment realms but it removes the problem for the payer.

sabinanelke

Thank you, payrollpro, very much for the explanation. It is very helpful.

As you are more experienced in this subject, would you please be so kind and advise me, how to best make HMRC aware that the trader had the tax already deducted by the contractor? Would you still put it in the box 37 on SA103 although the trader does not belong to CIS scheme? Or would you leave it blank, but mention the deduction at source in box 19 of the tax return? I am really concerned that without stating the amount of tax already deducted, HMRC will not see it under trader’s records and will demand this tax to be paid.

payrollpro

Assuming your client's payment did not go through a payroll to do this, which would have meant the P60 would have been a good substitute tax certificate, then someone needs to issue some sort of certificate.

I don't think the CIS forms should be used because this is not CIS work but why not demand a tax certificate similar to the one used for CIS. Anyone making a payment net of any form of tax withhold is required by law to issue a tax certificate, unless it is a dividend which carries a tax credit instead.

Your client then has evidence that not only was a payment made but it was net of a tax withhold which you can then wash through their final accounts as tax prepaid. As long as you can prove this you merely complete the SA, compute the tax due and reduce it by this withheld amount.

It's not ideal but I think we need to understand that payers are completely confused about their responsibilities and worried about their liabilities and do this to protect themselves.

deanshepherd

Sounds like theft to me!

It is the engager's responsibility to assess whether a sub-contractor should be paid gross or whether they should be paid via the payroll. There is no half-way house, it is one or the other.

payrollpro

Not sure I'd completely agree with you Dean, though I understand the sentiment.

It is a fact that some of our clients have such an amateur business set up that their clients could, and often do, face a status assessment. I have dealt with two cases where a small contractor noisily insisted they were in business to get gross payment and then tried to claim they were employed in order to avoid the tax requirements. One, in this case, even had the effrontery to try and claim notice, holiday pay etc as an employee and was quite open about the fact they were actually exploiting deficiencies in the paperwork.

These two got short shrift, but I suspect many other organisations get caught. I therefore fully understand the attempts they make to protect themselves.

I currently have a dozen cases for my client where I am trying to effect payment but even I am struggling to establish conclusively that my client is safe in making gross payment. I totally agree there is no half way house but it is being certain that gross payment brings no risk which is the problem. So far I have cleared about four, insisted on withhold on another four and have just two outstanding and to be honest the reluctance of the so called "trader" to cooperate leads me to suspect that this might be two more who will conveniently forget to declare the income. Not sure I have any choice if I am to protect the client.

deanshepherd

payrollpro wrote: »

So far I have cleared about four, insisted on withhold on another four and have just two outstanding..

By 'withhold' I assume you mean pay them via the payroll?

I see no legal justification for making any other kind of tax deduction (other than CIS of course).

Any kind of informal deduction will create problems for the worker (no matter how little sympathy you may have for them) which will ultimately come back to bite the employer. Any employer making such deductions presumably has no method of paying those deductions over to HMRC either - hence, theft.

I fully understand the predicament though. I tend to staple an ESI tool report to the invoice for future ammunition.