New rules on PAYE liability
Employers may benefit from yet another change to the rules for collecting tax where HM Revenue & Customs (HMRC) recategorises a self-employed worker as an employee.
Recategorisation for past tax years normally results in the employer having to pay over to HMRC the income tax and national insurance contributions (NICs) that should have been paid for the worker under PAYE. Until 2006, HMRC generally accepted that the worker’s self-employed income tax covered the employer’s PAYE liability.
After the Demibourne case in the Court of Appeal, HMRC realised that it could not refuse a subsequent claim by the worker for repayment of the self-employed tax, but it would then be too late to reopen the settlement with the employer. That would leave HMRC out of pocket. Since then, the employer has had to pay the full PAYE amount, unless the worker signed a mandate authorising HMRC to set any repayments of self-assessed tax against the employer’s PAYE liability.
A change in the legislation has now introduced a formal procedure under which HMRC will set the worker’s self-employment tax against the employer’s liability, subject to some conditions. First of all, there has to be a ‘trigger event’. This can be an HMRC notice to the employer that tax is due on the payment, or a written agreement from the employer that they are liable to pay the tax, or receipt by HMRC of the mandate from the employee.
Further conditions are that the first trigger event for the liability occurs after 5 April 2008 and that the employer has not paid the tax. The new rules mean that employers no longer have to seek a mandate from self-employed workers.
Recategorisation often follows an HMRC compliance check. If you are subject to such a check, please get in touch with us right away, so we can help you ensure the best outcome.