TAXATION: Everald Dewar | To be or not to be ‘employed’ - That is the tax question
Most accountants and tax advisers have at some time been asked the question that apparently needs care in answering: Am I correct in treating certain service providers as self-employed?
The writer has been asked this question in a case described below. It is not about providing the answer, but in order to deal with the unanswerable I will give one salient pointer: It is all about control.
It is necessary to familiarise oneself with the relevant legal rules, but because of the risk of losing readers who, like myself, find tax laws indigestible, I will give a practical example.
A medium-sized consulting company has been treating a
number of individuals as self-employed for several years. During a pay-as-you-earn (PAYE) compliance review, the revenue officer challenged this treatment and stated that the individuals should have been treated as employees.
The company objected, stating that the individuals work for the company only on the understanding that they will be treated as self-employed, and that they would go elsewhere if the company seeks to treat them as employees.
The tax officer considered the situation and made a formal ruling that these individuals were employees and issued an assessment for outstanding PAYE.
The company turned to the writer for guidance, and a suggestion was made that rather than seeking to challenge the ruling and probably losing the case, the company should request that the individuals be allowed to file self-employed tax returns.
Further, there were individuals that were definitely employed and the company should seek to shift the burden of PAYE to those individuals.
The result: Some demanded more pay to compensate for the tax and, as predicted, some moved on at the first mention of employment.
Under normal circumstances the answer to the difference between someone who is self-employed as opposed to being an employee is straight-forward. That is to say an employed person operates under a 'contract of service' and is subject to the supervision, control and directions of the employer as to how the work is done, while a contractor - the self-employed - does not.
The question of control is at the heart of the issue. In the case of a soldier, his duty as described in 'The Charge of the Light Brigade', a poem by Lord Tennyson, is straight-forward: "Theirs not to make reply, Theirs not to reason why, Theirs but to do and die".
But sometimes things are not as straight-forward as a soldier's duty. Persons who would normally be considered employees have negotiated contracts in which they deem themselves to be self-employed. The problem is compounded where the contract could be performed by an employed as well as a self-employed person.
The law was amended in 1996 and provides that where a contract makes someone self-employed but is nevertheless subject to control and direction, as to when, where and how duties are conducted, that person is seen by law to be working as an employee and will have tax deducted from fees paid for the service.
He could instead contract his services through a limited liability company set up for that purpose.
The law recognises that tax can be avoided naturally by the use of companies where the service is supplied through the company. However, the individual performing the service is controlled by the person to whom the service is supplied and that individual is deemed to be employed.
It should be noted that where the person procuring the service sets the working conditions under which the worker carries out the task, the special rule will apply where there is a right of supervision, direction and control, and not necessarily that those rights are exercised. This should not be confused, however, with legitimate suppliers of service who are genuinely self-employed - take, for example, the position of an entertainer who sets up his own company and contracts out his services to third parties.
During my high school years I was fond of The Death Merchant, a series of action-adventure books written by Joseph Rosenberger. Richard Camellion, a fictional character, gets the impossible missions, the operations that cannot be handled by the FBI, CIA, or any other legal or extra-legal force. He is told what needs to be done but not how. His contractor will deny his existence if he is captured.
This I would advise, dear reader, is an example of being self-employed.
Everald Dewar is senior
taxation manager at BDO Chartered Accountants
in Kingston. Email email@example.com.