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 knowledge 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) Control – “the control test is the basic test, that is used by the common law rules, to identified whether there is a relationship between the employee and the company or the individual that they work for. Under this test, the employer has the right to tell the worker what to do, how, when and where to do the work. ”
b) Financial risk – “A person, who risk own money, i.e. purchasing assets needed for the work and covering the running costs and paying all occurred costs and materials, are surely self – employed, whereas employees do not have to worry about the capital. A good example of a financial risk, where a skilled worker has to pay for training to retain the necessary skills needed, which is subsequent contributions. 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 – an employed person: “they have to do the job, 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 job to other one, they are paid hourly, weekly or monthly, they can be paid for overtime or get a bonus, whereas a self- employed: 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 necessary to do a job, not only small tools, which employees provide for themselves, they accept 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 companies and firms, they must do incorrectly work in their own time and 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 prevents the person from doing a job 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 firm, and then she was not paid hourly, but be paid a fixed price for her job. She is responsible to pay her own tax liabilities and Class 2 National Insurance contributions, that a self – employed person must do, and she 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.
2. UK income tax system covering:
Taxable persons – “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 has to 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 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.”
Application of surcharges – “any interest due, on tax paid late, the individual may be required to pay ‘a surcharge’. The surcharges are 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 altered (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 accumulated.”
Interest on Income Tax – “for the self – assessment, interest is charged on all late payments of income tax. Interest is also charged if a surcharge is paid late.”
I. Interest charged on overdue income tax is computed 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 changes 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. The rate of overpaid income tax is lower 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.”
Penalties for a tax return:
a) “Failure to notify HMRC in the tax year within six months of the end of the tax year, a taxpayer could pay a maximum penalty equal to the amount tax remaining unpaid on 31 January following the end of the tax year.
b) Late submission– A £100 can occur, if a tax return is submitted late and further £100 is place if the return is submitted later than six months. Any further penalty may be added 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 – an error is a factor to be charged for. Every error needs to be checked to be identified. The penalty will occur, if loss of revenue will be based on an error and can be 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 from 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. This system applies to all payments which are assessable as employment income, consisting wages, salaries, bonuses, commissions, etc.”
b) “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 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.”
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 keep recording 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, which she needs 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, these factors indicate 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