TAX TRAPS
TAX TRAPS
Tax traps for unsuspecting taxpayers
CASH WAGES
Clients who have to employ people insisting on being paid cash will fall into the trap that the cost of wages cannot be charged as wages against profit.The effect of this is that the client will be forced to pay tax on profits which were not earned. Whilst wages are a deductible expense under the rule " being expended wholly and exclusively for the purposes of making a profit" certain rules must be observed for the Compliance Officers of HMRC to allow it.
1 The client must register as an employer
2 The client must administer a PAYE scheme
3 Only in the circumstance that an employee demanding cash wages without deduction is grossed up in the PAYE records and Tax and NIC is borne by the employer will it be acceptable as a legimitate deduction. This step may run into trouble if the employee does not provide an address, a NI number and date of birth as the compliance records will not be acceptable to HMRC and possibly initiate an investigation
THE COST OF NON COMPLIANCE
Where HMRC believes that the employers rules are not being implemented PAYE compliance teams will descend on a business and investigate the wage records.
In the event of non compliance PAYE and NIC both employee and employers contributions will be levied on the employers even if the employees have left , HMRC will go back 6 years and charge interest on deductions computed . Whilst the employer can claim tax relief on these amounts ( not the interest) against the profits of the business invariably the employer will bear the cost. The amounts involved can escalate into an overwhelming amount which could bankrupt the employer and /or the business. The employees will not be pursued as it is the employers responsibility to implement the regulations. A rule of thumb is to add 50% onto net wages paid and calculate interest of approx 6% for every year outstanding
Please contact us if you need help on this subject
THE STATUS OF EMPLOYMENT . IS YOUR ASSISTANT SELF EMPLOYED OR EMPLOYED
The question of status is a legal no mans land .There is no statutory definition of employment. The legal arguments fall back of the decisions made in a multidude af cases covered by the law of master and servant.
The key factors requested by HMRC are
If the response is yes to the following then status may be EMPLOYMENT
- Does the customer have the right to control how you perform your services, what tasks have been carried out when and where must they be performed?
- Are you obliged to accept workl and is you customer obliged to supply work?
- Are you committed to fulfilling your contract personally
- Are you committed to working for just one customer
If the response to the following is YES then the status maybe SELF-EMPLOYMENT
- Can you (with written permission from your client) assign someone else to carry out your duties?
- Are you in business on your own account and are you responsible for the success or failure of that business
HMRC does refer to the possibility of doubt over status if the criteria become mixed up . HMRC literature does not insist , but gives the impression that the rules are written in stone.
It is extremely difficult to define the relationship.That is the reason why so many contract for services or contracts of service ended up in the civil courts for a judge to form a legal opinion which was binding on the litigant parties. For example if you are running a business for which you are solely responsible and you have a customer who wants you at its place of business every Monday from 9 a.m to 12.pm . Are you employed or not employed ?
There is a need for a robust defence of your position to deny any superficial tests imposed by HMRC