Establishment of Katy’s employment status
Written by: Anna Janicka
To: John Ogden
Date: 11th June 2018
Table of Contents
The tests applied to an employed person and a self – employed individual 3
UK income tax system 4
The administration of the PAYE system 6
This report was requested by John Ogden and must be submitted by 11th June 2018.
The purpose of this report is to discuss the tests applied to Katy’s situation, whether she is employed or self – employed, and give a general overview of the UK income tax system, and explain the administration of the PAYE system.
1. The tests would be applied to Katy’s situation by HMRC in deciding whether she is employed or self – employed.
a) Test of control – “the control test is the basic test, that is used by the common law rules, to determine whether a relationship exists between the employee and the company or the person that they work for. Under the common – law test, the employer has the right to tell the worker what to do, how, when and where to do the work. ”
b) Test of financial risk – “A person, who risk own money, i.e. purchasing assets needed for the work and covering the running costs and paying for overheads and materials, are surely self – employed, whereas employees do not have to risk the capital. A good example of a financial risk, where a skilled employee has to pay for training to obtain the necessary skills needed, which is subsequent participations. This can be treated as a self – employment, in an equal way as investment in equipment to be used in a trade. There may also be a need to correct by self – employers unsatisfactory work at their time without getting any money for it. The important indicator of self – employment is a risk of quoting a fixed price for a job, with the risk of any costs if the job takes longer than expected, and as well a risk of making a loss. ”
c) Equipment – “A self – employed individual provides own equipment that is needed to do the job.”
d) Work performance and correction – as an employee: “they have to do the work, someone can tell them at any time what to do, where to carry out the work or when and how to do it, they can work a set amount of hours, someone can move them from one task to other task, they are paid hourly, weekly or monthly, they can be paid for overtime or get a bonus, whereas a self- employed person: they can hire someone to do the work or get helpers on their own costs, they risk their money, they have to provide own equipment needed to do a job, not only small tools, which employees bring for themselves, they agree to do a job for a fixed price and it does not matter how long it take, they can decide what to do, how and when to do the work and where the job will be done, they work for a number of different people, they have to correct unsatisfactory work in their own time and at their own cost.”
e) Holidays – as an employee, they get a holiday and are paid for sickness, but this depends on a contract (duration of paid sickness). However, a self – employed individual does not get a holiday or is not paid for a sickness.
f) Exclusivity – “an exclusivity clause in a zero hours contract is when the employer disturbs the person from working for someone else, and even he himself does not guarantee any hours of work. ”
From the above tests, if Katy was self – employed then she should provide her own equipment to do her job rather than getting it from the company, and she was not paid hourly, but get a fixed price for her job. She pays her own tax liabilities and Class 2 National Insurance contributions, that a self – employed person has to do, and does not get a holiday and is not paid for a sickness, whereas an employed individual normally gets. In that case, HMRC would consider Katy as a self – employed person.
2. UK income tax system covering:
Taxable persons – “is an individual who lives and works in the UK during a tax year and is liable to pay income tax from all incomes for that year.”
The Tax year – “is a fiscal year or a year of assessment, runs from 6th April 2017 and ended on 5th April 2018.”
The self-assessment completion system – “The information requested in a tax return relates to the tax year just ended. A tax return must be completed in full. It is not allowable to omit figures or to make entries like, ‘see accounts’ or ‘as submitted by employer’. Nevertheless, asked to submit accounts or other relating documentation with the return, a taxpayer is under no liability to do so, but it is obligatory to obtain all relating documentation in case HMRC asks into accuracy of a return.”
“A submission of self – assessment tax returns must be filled (submitted to HMRC) on or before the following dates: for papers returns, 31 October following the end of the tax year, for automatically filled returns, 31 January following the end of the tax year.”
The payment of a tax due in relation to a self – assessment is normally payable as follows:
• “The taxpayer’s income tax liability for the tax year in relation to all sources of income is accumulated. This tax liability is rose by the amount of any Class 4 National Insurance contributions (NIC’s) which are due for the year.”
• “Payments on account of the total liability (POAs) are due on 31 January in the tax year and on the following 31 July. For example, the POAs for the 2017/18 are due on 31 January 2018 and 31 July 2018. Each POA equals to 50% of the taxpayer’s liability to income tax and Class 4 NIC’s for the previous year, less any tax which was paid by deduction at source.
• POAs are not required if the taxpayer’s total liability to income tax and Class 4 NIC’s for the preceding year (less deducted at source) was under £1,000.
• POAs are also not required if more than 80% of the taxpayer’s liability for the previous year was satisfied by deduction of tax at source.
• There are penalties for making a claim fraudulently or negligently, when a taxpayer who believes that his or her liability for the current year will be less than in the previous year may claim to make reduced POAs.”
Application of surcharges – “any interest due, on tax paid late, the individual may be required to pay ‘a surcharge’. The surcharges operate as follow:
I. If all or part of a balancing payment remains unpaid more than 28 days after the due date, a surcharge increases equal to 5% of the amount unpaid.
II. If a self – assessment is amended (or discovery assessment is raised) and any of additional amount which becomes payable remains unpaid more than 28 days after the due date, a surcharge arises equal to 5% of the amount unpaid.
III. Any amount that remains unpaid more than six months after the due date is subject to a further 5%surcharge.
IV. Surcharges are payable 30 days after the date on which they are imposed.”
Interest on Income Tax – “under the self – assessment system, interest is charged on all late payments of income tax and Class 4 NICs. Interest is also charged if a surcharge is paid late.”
I. Interest charged on overdue income tax and Class 4 NICs is calculated as follows:
a) “In the case of late POAs and balancing payments, interest runs from the due date of payment up to date on which the tax is actually paid.
b) When discovery assessments and amendments to self – assessments, interest runs from the date for the relevant year despite the tax itself might not be due for payment until a later date.”
II. Interest on overpaid income tax, is calculated at a lower rate than the rate of interest on overdue income tax but is itself exempt from income tax. It runs from the relevant date to date on which repayment is made to the taxpayer. The relevant time is:
a) “As regards POAs and any other payments of income tax, the date of payment.
b) As regards income tax deducted at source, 31 January following the tax year for which the tax is deducted.”
a) “Failure to notify chargeability to tax – Failure to notify HMRC in the tax year within six months of the end of the tax year, a taxpayer could be liable to a maximum penalty equal to the amount tax remaining unpaid on 31 January following the end of the tax year.
b) Late submission of a tax return – A £100 fixed penalty is imposed if a tax return is submitted late and further £100 penalty is place if the return is submitted later than six months. Any further penalty may be placed if the return is more than 12 months, an additional penalty may occur up to 100% of the tax liability for the year.
c) Submission of incorrect tax return – when a taxpayer, fraudulently or negligently, submits an incorrect tax return, then a penalty may be imposed of up to 100% of the amount of tax underpaid.”
3. The administration of the PAYE system:
a) Basis of assessment – “the income tax and National Insurance contributions are deducted from employees’ wages and salaries. The amounts reduced form employees, payable by the employer must be paid within 14 days of the end of the tax month in which the employees are paid. A tax month runs from the 6th of one month to the 5th of the next month. However, employers usually make a payment to HMRC on or before the 19th or 22nd of each month. Therefore, employers whose payments to HMRC do not exceed an average of £1,500 a month are permitted to make quarterly payments. The PAYE system applies to all payments which are assessable as employment income, consisting wages, salaries, bonuses, commissions, etc.”
b) Tax codes – “HMRC issues a tax code for each employee for each tax year, that represents the amount which employee may earn in that year before becoming liable to income tax. The tax code takes into account a number of factors which may affect an employee’s income tax liability, including:
• The personal allowances to which the employee is entitled.
• The employee’s expenses and tax reliefs (i.e. payments deductible from total income).
• Adjustments made in order to collect tax on benefits in kind.
• Adjustments made for tax underpaid or overpaid in previous years, including tax debts of up to £17,000 and self- assessment balancing payments of up to £3,000.
The tax code allocated to an employee is equal to one- tenth of the accumulate of the above items, rounded down to a whole number.”
c) Operations of the PAYE system:
Employers who operates manual payroll systems are issued with sets of tax tables which enable them to calculate the amount of income tax, that should be deducted from an employee in a given week or month. The tables used are:
Table A – “This table spreads an employee’s allowances evenly over the year, giving 1/12th of the allowances per month or 1/52nd of the allowances per week.
Table B – This table is used to look up an employee’s income tax liability for the year to date, after the entitlement to tax- free pay has been taken into account.”
The procedure for each employee in each week or each month is:
• “The tax code is looked up in Table A, which presents the amount of tax- free pay to which the employee is entitled for the year to date.
• This is then subtracted from the employee’s gross pay for the year to date giving the employee’s taxable pay for the year to date.
• The employee’s taxable pay for the year to date is looked up in Table B, which shows the tax due for the year to date. Further tables are used if the employee is a higher payer.
• The tax paid to date by the employee in previous weeks or months is subtracted from the tax due for the year to date, giving the employee’s income tax liability for the current week or month.”
d) PAYE forms used:
• “P2 – a notice of coding, sent by HMRC to both the employer and the employee.
• P11 – deductions working sheet.
• P11D – an end of year return showing an employee’s benefits in kind and expenses for the year. This form must be submitted by 6 July following the end of the tax year. Employees must be provided with copies by the same date.
• P45 – a four- part form used when an employee leaves an employment, shows the employee’s tax code, gross pay to date and tax paid to date. Part 1 of the form is sent to HMRC and the other three parts are given to the leaving employee, who retains part 2 and sends part 3 to HMRC, therefore the employee retains part 1A.
• P46 – a form providing details of a new employee who does not have a P45 form from previous employment. Sent to HMRC by the employer.
• P60 – certificate of gross pay and tax deducted, given to employees by employers at the end of the tax year. Form P60 must be provided to employees by 31 May following the end of the tax year.”
In conclusion, Katy records her time on each client’s books and invoices, and she is paid at agreed hourly rate. Katy is paid gross and attends to her own tax liabilities and pays Class 2 National Insurance contributions. However, she is provided with equipment like, a laptop and a printer needed to do her work, and stationery with the firm logo on it. It can be concluded that Katy works as an employee, therefore she is not entitled to get a holiday and be paid for a sickness, this tells that she works on self – employed basis.
“Taxation”, Finance Act 2009, Alan Melville
Chapter 7, Income from Employment
Part 1, Income Tax and National Insurance