Taxation and employment status matters
07 February 2018
Failure to Prevent the Facilitation of Tax Evasion
Among other things, the Criminal Finances Act 2017 has introduced a corporate criminal offence for failure to prevent the criminal facilitation of tax evasion. If an individual does not pay the correct amount of tax and national insurance because he or she has claimed, incorrectly, to be self-employed, the engager of that individual can be held liable.
The defence against liability under the Act is for the engager to demonstrate that it has put in place a system that identifies and minimises the risk of tax evasion.
This legislation is criminal not civil law so the standard of proof is certainty beyond reasonable doubt. Tax specialists are generally of the opinion that aspect of the Act is not likely to be much used except against the accountants and solicitors who sell ‘schemes’ of tax evasion.
Changes to Payments in lieu of Notice and all Post-Termination Payments
HMRC have announced changes to taxation of post-termination payments to come into effect from 6th April 2018.
Under current rules, if there is a contractual right to pay in lieu of notice (PILON), then payments are subject to tax and national insurance, but if there is no contractual right and it cannot be shown that it is the employer’s custom and practise to make such payments , they are within the £30,000 exemption and not taxable.
Under the new provisions all sums that would have been paid if notice had been served properly are going to be subject to tax and national insurance. So if an individual was entitled to four weeks notice, but was not given any notice then a sum equivalent to four weeks pay in the post-termination payment would be taxable; if that pay would have qualified the employee for a bonus of some sort, the sum equivalent to the bonus would be taxable. The easiest way to think about it is to imagine what would have been paid to the individual had proper notice been served and he/she had worked to their last day. All money for that notional work is subject to tax and national insurance.
There will be few termination payments after April 2018 that will be tax free and covered by the £30,000 exemption unless they are awarded by a court, or are for death, disability or injury.
ECA members are advised to consult with their accountants prior to confirming any post-termination payments for clarification on which, if any, part of the payment may be subject to tax and national insurance.
Reverse Charge VAT
The Government has announced proposals for a VAT reverse charge in construction to come into effect from 1st October 2019. This is designed to tackle the perceived risk of VAT fraud within construction labour supply chains.
Under the proposals, all VAT being paid between construction firms – contractor to subcontractor
and subcontractor to subcontractor, will be ‘reverse charged’. In other words, a main contractor who owes a subcontractor £100 plus VAT of £20, will only pay the subcontractor £100 and will pay the £20 VAT straight to HMRC. The subcontractor will receive only 83% of the money that it is currently receiving. All contractors and subcontractors paying anyone else for work done will be required to reverse charge VAT.
Whilst, subcontractors won’t have to pay as much VAT to HMRC as they currently do, their cash flow will be significantly impacted. In addition, all invoicing systems, including any accounting software used will have to be changed to accommodate the new system.
IR 35 Reforms
Following its introduction in the public sector, the Government may be considering rolling out IR35 reform to the private sector. The proposals put the responsibility for the correct application of IR35 with the engager and not with the Personal Service Company Contractor.
Under the possible reforms, where a Personal Services Company contractor is paid ‘off payroll’, (i.e. without the deduction of tax and national insurance under PAYE), the body making the payment would be legally and financially responsible for deciding whether they require the personal services of the particular person engaged through the services company. If they do, they would account for tax and national insurance to the level of PAYE. Since the engager will be ultimately responsible for any shortfall in the correct amount of tax due, including employers NI, many are likely to err on the side of deducting PAYE. In a nutshell, if a decision to enact new legislation is taken, the engager and not the PSC will have to decide whether the worker is engaged for their personal service and the financial cost of getting it wrong will be the engager’s.
Employment Status - Private Member’s Bill
A Private Member’s Bill – The Workers (Definition and Rights) Bill – has had its first reading in Parliament and is due for the second reading in April 2018. The stated purpose of the Bill is to implement key recommendations made in last year’s Taylor Review of Modern Employment Practices, including the ‘gig economy’.
The Bill proposes to replace the current different employee, worker and self-employed statuses with a single employment status of a ‘worker’. As well as giving existing employment rights to those that fall under the new category of ‘workers’ the Bill sets out additional employment rights including the right to ‘fixed and regular’ hours of work, notice of changes to working hours including overtime and shift working, and guaranteed overtime pay at double time where the employer does not give the requisite notice or cancels overtime or shift work after it has been accepted by the worker. It also places the onus at employment tribunal on the ‘employer’ to prove that an individual was not a ‘worker’.
Although the Bill might not become law, its progress through Parliament is likely to stimulate further debate on employment status.
Government response to Taylor Review of Modern Working Practices
ECA will shortly issue information for members on the Government’s recent response to the Taylor Review of Modern Working Practices which includes further consultation on employment status.