Employment taxes

Optimising processes, outsourcing where necessary and using tax technology solutions can all help make year-end reporting as painless as possible without compromising accuracy.

We help businesses of all sizes with employer compliance in several ways.

Our experts assist clients with payroll operations and all aspects of year-end reporting for UK and international employees, winning back time they would otherwise spend on compliance.

We help refine processes to increase efficiency, from information gathering to completing final checks and making timely payments. This is also an area of increased focus for HMRC when carrying out employer compliance checks.

Tax technology plays an increasingly important role in efficiency. We support clients implementing new technology to enhance current ways of working, including process automation, data analytics and specialised tax solutions.

We also support clients by undertaking risk reviews, providing training, mapping processes and advising them on the treatment of specific items, such as termination payments and equity awards.

Getting employment status for tax right is complex and subject to increasing HMRC focus, not least due to the off-payroll worker rules introduced to the public sector in 2017 and extended to private sector organisations in April 2021.

When reviewing a contractor’s employment status, you need to look at the actual working practices, not just the written contract. There are a range of factors to consider:

• Who directs or controls how the work is done?
• Is the worker obliged to accept work, or are you obliged to provide work?
• Can the worker hire someone else to do the work or provide substantial help?
• Does the worker face significant financial risk when taking on a job?

Although the HMRC Check Employment Status for Tax (CEST) tool can be used to determine status, it does not deliver a decision in every case. HMRC will accept CEST determinations, provided that the information inputted into CEST is accurate. Furthermore, while it reflects HMRC’s view, this has been challenged successfully in recent First-tier Tribunal decisions.

We support clients in determining employment status, from individual reviews to providing training and guidance on their off-payroll worker population.

The IR35 anti-avoidance tax legislation is designed to tax “disguised” employment and applies to medium or large businesses engaging workers who operate through personal service companies (PSCs).

Medium and large businesses must review the employment status of contractors engaged through PSCs, given they may be treated as employees for tax purposes. The company benefitting from the services is responsible for determining the employment status of any individual engaged through a PSC and communicating this in a written statement.

For engagements treated as employment under these rules, the entity that pays the PSC’s fees - either the end user or an agency - must operate PAYE withholding on all payments and pay employer’s NIC on the gross amount invoiced, excluding VAT. Payments within IR35 will also be brought into apprenticeship levy calculations.

To avoid penalties, businesses will also need to be able to show that they have taken reasonable care to comply with these rules, such as by ensuring robust procedures are in place, regularly reviewing engagements and seeking professional advice when needed.

You can read more about IR35 here.

The tax treatment of termination payments should be reviewed before payments are agreed to ensure that tax is calculated correctly.

In some circumstances, a £30,000 exemption from income tax and national insurance contributions (NICs) may apply if a payment is for loss of employment. The starting point, however, is that any payment that is a reward for service should be subject to PAYE and NICs as usual. Whether or not the £30,000 exemption applies is often not clear-cut, and HMRC may challenge the treatment of termination awards that have not been subject to tax and NIC.

Common risk areas that employers should be aware of include the following:

• New rules effective from April 2018 introduced the concept of taxable Post-Employment Notice Pay (PENP), the calculation of which can be complex. The rules aim to treat the equivalent of notice pay as fully taxable and subject to NIC, even where the notice period is not actually worked
• Payments for restrictive undertakings are taxable in the same way as salary
• Lump-sum payments to employees who then retire may well be treated as a taxable retirement benefit. Whether or not this treatment should apply at the point the award is made should be reviewed on a case-by-case basis

Any excess over the £30,000 exemption of a qualifying payment is taxable through the payroll, and since 6 April 2020 Class 1A employer’s NIC has also been due on the excess over £30,000.

The CIS requires businesses engaged in construction to file monthly returns and, in some cases, to deduct tax at source from payments to subcontracted construction workers.

The CIS affects contractors and sub-contractors engaged in construction operations, including construction, alteration, repair, extension, demolition or dismantling of buildings or structures, whether or not they are permanent.

Contractors

A CIS mainstream contractor is a business that pays subcontractors for construction work. This would usually be a construction business, such as a property developer, although businesses that do not usually operate in the construction industry can also be caught.

If a business makes payments under construction contracts exceeding £3m in any rolling one-year period, it could become a “deemed contractor” even if its main trade is not construction.

The key obligations of a contractor under CIS are:

• registering with HMRC
• verifying the identity of its subcontractors
• deducting tax from payments to sub-contractors and providing statements to sub-contractors to inform them of this when subcontractors are not registered for gross payment
• making monthly returns to HMRC

Subcontractors

CIS subcontractors are businesses that carry out construction work for contractors, including by sub-contracting to another person or entity. You can be both a contractor and a subcontractor.

Subcontractors must register with HMRC to be paid gross or, in some circumstances, net of 20% CIS income tax. If a subcontractor chooses not to register, the deduction amounts to 30%. These deductions count as advance payments towards subcontractors’ tax and national insurance liabilities.

Read more about property tax issues here.