Taxing Times – August 2018

Hello and welcome to August! In this edition we have the following articles and updates for you to read and (hopefully) enjoy:

  • IR35: Potential changes to self employment in the private sector;
  • PAYE update (with some timely reminders now that we are firmly into holiday season);
  • IHT: an important new case
  • Dates for your diary
  • Tax News

 “Off payroll working” – where next?

In last month’s Taxing Times we looked at Who or What is a Worker, exploring the debate/confusion that continues regrading an individual’s status for employment law (and therefore employment rights) purposes.  There is no concept of a worker for employment tax purposes; a person is either an employee for tax (PAYE Class 1 primary and secondary national insurance contributions (NIC)) or self employed (Self assessment and Class 4 NIC).  But the high profile “worker” cases such as Pimlico Plumbers and Uber do illustrate how important it is for engagers to get a person’s status right.

A short history

HMRC have been worried about engagers correctly categorising someone as either self employed or employed for many years, to the extent that they introduced the (dare I say, not particularly effective) IR35 legislation back in 2000.  HMRC obviously prefer people to be employees, because they get a regular tax take through PAYE but primarily because they get a huge amount of revenues from employers having to pay secondary Class1 NIC (currently at 13.8%) which is not due on self-employed engagements.  Amid government concerns that people were abusing the IR35 legislation by delivering their services through a personal service company (PSC) and avoiding being classed as employees, in April 2017 controversial rules on “off payroll working in the public sector” were introduced.  These were a game-changer as they changed the responsibility for deciding if someone was self employed from the PSC to the engaging party itself.  And more importantly, it changed the responsibility for deducting PAYE, and therefore the liability for getting it wrong and failing to deduct PAYE, to the engager.  And as engagers in the public sector tend to be very large organisations with lots of engagements, it made it a lot easier for HMRC to tackle one entity instead of chasing lots of small PSCs (which just wasn’t effective and has not netted them much money over the years).

The upshot of the change to the IR35 rules for the public sector is that a huge number of engagements which were previously treated as self employed are now being treated by those public sector bodies as employed.  The tax and NIC take into HMRC’s coffers has gone up significantly. HMRC estimates an additional £410m of income tax and NIC have been remitted from public sector engagements since April 2017. It also says the number of interventions required to reach the same number of PSCs has been significantly reduced, because HMRC can now approach a client in order to obtain information on a large number of PSCs at once. On this basis, the government judges the public sector reforms a success.

What now?

There is now a consultation in progress (closing on 10 August) to extend the new public sector version of IR35 to the private sector. In a factsheet accompanying the consultation, HMRC  stated that the cost of non-compliance in the private sector is projected to increase from £700m in 2017/18 to reach £1.2bn a year by 2022/23 as the numbers of people working through PSCs continues to grow. It is therefore no wonder that HMRC are worried about the use (abuse) of PSCs to avoid PAYE and NIC (even if their statistics are over-inflated, as has been suggested). The continuing challenge for HMRC in the private sector is the need to deal with each PSC individually, and the difficulties in collecting both information (sometimes long after the engagement with the client has ceased) and tax (when the PSC often no longer has the means to pay any liabilities). There are a number of suggestions put forward by the paper, but  it looks like the hot favourite is to extend the public sector rules, which HMRC are vey pleased with, to the private sector.  So the use of PSCs may have had their day.  One thing is sure, something will change for the private sector.  We can only watch this space and see what happens after August.

PAYE update

Are you ready for a summer holiday?

With the main summer holiday season just beginning, this time of year can also be a busy time for annual leave requests.  Whether you’re a parent juggling childcare, between work and school holidays, or an employer, trying to keep your business running while the sun shines, it can be difficult balancing everyone’s needs.  And for the payroll department there will be additional calculations required to ensure the correct holiday pay is paid.

We all love a good holiday, but calculating holiday pay has become a minefield due to the complexities and issues involved.  If your employees work a set number of hours and receive a fixed salary, calculating annual leave entitlement and holiday pay is relatively straightforward, but if staff have irregular hours, work overtime, or receive commissions or bonuses, then the calculations can become quite tricky.

Holiday Entitlement

Currently, workers are entitled to a minimum of 5.6 working weeks paid annual leave per year (known as statutory leave) which equates to 28 days of leave per year for someone who works a five-day week. Part-time workers are entitled to the same amount of holiday (pro rota) as full-time colleagues.  The first 4 weeks of annual leave is required by the EU Working Time Directive and workers also receive a further 1.6 weeks of annual leave as required by UK law.  There is no legal right to paid public holidays, but the worker’s contract should state if they are to be paid for these holidays. If paid, they can be counted as part of the statutory 5.6 weeks of holiday, but employers can provide them in addition, if they so choose.  Some employees receive further additional holiday entitlement as a part of their contracts too.

What to Pay?

In general, workers should receive the same pay while they are on annual leave as they normally receive while they are at work. They should not be put off from taking leave because they are paid less while they are away.  Holiday pay must include overtime, bonus or commission if these usually make up part of the regular pay.

  • Fixed working hours – If working hours don’t vary (part time or full time) then pay will be calculated using the usual pay rate.
  • Shift or rota work – If staff work shifts (part time or full time) then holiday pay should be the same as the average number of hours worked at the average hourly rate in the previous 12 weeks. This shouldn’t include any sick periods.
  • No fixed hours – For casual workers with no normal hours, for example on a ‘zero-hours’ contract, the holiday pay will be the average pay received over the previous 12 weeks. These should be weeks in which the employee was paid.
  • Commission – Holiday pay must include what an employee would normally get in commission if they were working.
  • Overtime – Overtime that is regularly worked (guaranteed and non–guaranteed) must be included when calculating holiday pay.  If staff only work overtime on a voluntary basis and it is genuinely just worked occasionally and infrequently, then it currently doesn’t need to be included.  Some recent court decisions have ruled that voluntary overtime should be included, but these have been decided on a case by case basis where it was proven that it had been worked in a regular and settled pattern over a period of time.
  • Rolled-up holiday pay – Employee’s must get holiday pay when they take their annual leave.  Holiday pay should not be spread over the year by adding an amount on top of the staff hourly rate, which is known as rolled-up holiday pay.
  • Holidays and Leave- Staff will still accrue holiday when they are off sick, on maternity leave and parental leave. They can only get paid for any outstanding holiday entitlement they haven’t taken if they are leaving their employment (known as ‘payment in lieu’). With ever changing legislation, it’s hard to keep up with the right way to calculate holiday pay.  As a starting point you must set out your employee’s paid holiday entitlement in their employment contract to avoid any disagreements and make sure you get advice from the free Acas helpline, or your HR adviser.

A timely reminder: Tax-free childcare available on school holiday clubs

HMRC is reminding parents that they are able to use the tax-free childcare scheme to pay for holiday clubs after it was revealed that almost a third of parents feel stressed trying to arrange childcare for the school holidays and more than half  admitted they look forward to their children returning to school in September.

The new “tax-free childcare” system (see Taxing Times July edition for more details link) means that parents, both employed and self-employed, can apply online for tax-free childcare for children who are under 12.

For every £8 parents pay into their childcare account the government will add an extra £2, up to £2,000 per child per year. The top up is added instantly and parents can then send electronic payments directly to their childcare providers.  Those providers don’t have to be only the traditional child-minders and after school clubs as over 58,000 registered childcare providers have signed up to the tax-free childcare scheme, including school, football, art and tennis clubs.

Simplification of benchmark scale rates for expenses

Employers will be pleased to hear that the government has decided to go ahead with plans to abolish receipt checking when benchmark scale rate payments (including overseas scale rates) are paid to cover food and drink for employees travelling on business. This will simplify expenses related to travel and get rid of a process which was felt by many  to be unnecessary (given that scale rates were introduced, why should employers also have to check receipts?)

Benchmark scale rates cover modest meal allowances with which employers can reimburse their employees for food and drink costs, as follows:

The simplification will come into force on 6 April 2019.

Holiday cottages: Tax payer wins IHT relief case

Recent cases on Inheritance Tax relief on holiday cottage businesses have all swung in HMRC’s favour, to the extent that we advisers were coming to the conclusion that getting Business Property Relief (BPR) on such a business was highly doubtful unless an unlikely number of additional services are offered.  A case this year has at last seen HMRC lose a challenge on the availability of IHT relief on a holiday cottage business.

The case HMRC have now just lost, however, was that of the executors of Mrs Graham on her Isles of Scilly holiday business. There were four properties plus some guest bedrooms that were occasionally used for B&B accommodation. There was a long list of services provided at the complex, such as swimming pool, sauna, BBQ, games area, laundry, a golf buggy available for hire, a welcome pack, an beautifully manicured garden, and help and guidance from the deceased’s daughter to assist the holiday makers. Services that were not provided were the daily making of beds and cleaning and tidying, and room service and meals.

The judge found that time spent on maintenance and management of the property/lettings (that is, work on the property investment activity) was slightly less than the time spent in providing additional services (the “trade” side). He did not take any single factor as the deciding one but looked at the whole picture and concluded that the additional services provided outweighed the “letting as a place to stay” and that BPR was available.

It was a close run thing; there was no clear conclusion one way or the other and there was a perhaps unusually high level of services that made it more like a hotel than a holiday home.  But at least the taxpayer won and this means (as long as HMRC do not successfully appeal) that holiday cottage owners now have a chance of demonstrating the very high level of additional services and personal care required to give make BPR a possibility.

Dates & Deadlines for your Diary

What’s new in the world of tax?

Bond paid accountant in costumes

Sean Connery, who played James Bond 007 in six official films, reportedly paid his accountant in costumes from the movies. It came to light after the 007 Elements archive had to purchase back original Bond costumes.

HMRC criticised for handing out £3m in bonuses

HMRC employees were handed £3m in bonuses last year, despite performance reports revealing that 4m calls to HMRC in the past year failed to get through…..

Alexa, pay my tax…

HMRC has announced a partnership with Amazon to allow taxpayers to ask their Echo smart home device for guidance when completing applications for tax credits such as child benefit. Angela MacDonald, HMRC’s Director General for Customer Services, said: “Alexa can help customers find out about what to do when they receive a renewal pack, how to change their circumstances, or how to find out about payment information”.

If only Alexa could also find the money to pay the tax bill!


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