Tax fiddle?

moneywondering

Hey all,

My wife is self employed as a hairdresser and, at the end of each month, receives a percentage of the total money she earns for her employer. Her pay slip each month shows the correct amount, however appears to be calculated as a higher percentage of a smaller amount. For example, if she earns £5000 she should receive 40% of this amount (ie £2000). The amount of £2000 appears on her pay slip but is stated as 46% of £4347.80.

This makes no difference to my wife's pay and she then pays the appropriate level of tax. I'm just wondering, is there any good reason why these figures would be used or does this sound like some kind of tax fiddle? Seems to me that, if her employer states that she only earned £4347.80 for their business, they can pocket the remaining £652.20 and not pay a penny of tax on it?! They have recently underpaid her and I want to make sure I have my facts straight before confronting them about this.

Many thanks for any help.

moneywondering

It just occurred to me, does it have anything to do with VAT? Guess 15% (old vat rate) added to 40% does give a total of 46%, although not sure if this should appear on her payslip? Any thoughts?

ceeforcat

Does your wife not have to meet a share of the running costs of the salon?

Pennywise

Yes, it will be the VAT.

Mahmood_Reza

Couple of issues, in no particular order. You said that your wife is self employed but that she receives a payslip, in addition other language used such "..as her employer" would suggest an employer-employee relationship and would not be looked at favourably by HMRC - as a minimum ensure that invoices are raised and issued by your wife and that it is clear that she is self employed.

Is your wife renting a chair? It may be that their system of accounting/documentation shows income generated net of certain costs - odd way of doing this, though not necessarily a fiddle.

John_Pierpoint

I think the poster meant "self billing invoice" ?
The rest of the amount the customer pays (54%) covers the costs etc. of the business.
It is like being a self employed taxi driver but not owning the cab or radio or meter.

moneywondering

Thanks for your replies.

Yeah I agree it is more like an employee-employer relationship and she's basically only self employed for tax purposes. Think her employer is trying to get out of any responsibilities with respect to holliday pay, sick pay, pension etc. It's quite common in the hairdressing industry.

Think I understand what is going on now, they seem to base her salary on takings less VAT and then add the VAT back and work out 40% of that amount. Seems as though they've taken VAT off at the current rate of 17.5% and then added it back at the old rate of 15%!!!

I'll get it sorted now!

JasonLVC

moneywondering wrote: »

Thanks for your replies.

Yeah I agree it is more like an employee-employer relationship and she's basically only self employed for tax purposes. Think her employer is trying to get out of any responsibilities with respect to holliday pay, sick pay, pension etc. It's quite common in the hairdressing industry.

Think I understand what is going on now, they seem to base her salary on takings less VAT and then add the VAT back and work out 40% of that amount. Seems as though they've taken VAT off at the current rate of 17.5% and then added it back at the old rate of 15%!!!

I'll get it sorted now!

Sounds like a rent a chiar scheme and the whole point of these things is to avoid VAT, so if the difference in what was expected and what was paid isa about 15%/17.5% then something has gone wrong somewhere.

Rent-a-Chair is basically where the salon owner charges the stylist a rent for the chair they use. Rent is exempt for VAT purposes meaning the salon owner doesn't need to register for VAT or charge it. The stylist then is self-employed and the rent they pay is usually based on a % of the takings they earn. Any additional things they use in the salon such as shampoos or gels would either be supplied by the self-employed person themself or is invoiced seperate by the salon owner which would be VATable (if the salon owner is VAT registered).

If a payslip is beign received then this suggests a contract of employment which will destroy any attempt by the 'employer' that they do not have employees. Arguably, the salon owner should be invoicing the stylist for rent and consumables used based on turnover - but VAT should only apply to the consumables bit, not the chair rental aspect.

HMRC are super-hot on this sort of thing. A truly self-employed person can come and go as they please, pick and choose customers, work 1 day a week or 7, etc - any form of restriction on this freedom would be seen by HMRC as a restrictive practice and likely link the restriction to a condition of employment.

Be very careful and get this checked out by an Accountant (and pay them) to make sure this is right. Here's an interesting link that explores the legal ramifications of this sort of thing :-

http://www.hji.co.uk/community/forums/chair-rental-self-employment-and-the-law-11426.aspx

moneywondering

Thanks for that info. She doesn't rent a chair and as far as I can tell she is almost certainly employed in the strict sense of it. Her accounts are done by an accountant and we do everything correctly from our end. Is my wife liable to get into trouble with HMRC if they deem that she is employed and not self employed or is this the employer's responsibility? I've read on the HMRC website that it is the solely the employer's responsibility to correctly determine the employment status of somebody working for them?

Oh and she does receive a payslip every month, however this is without deductions and the appropriate tax and NICS are paid through tax returns

Mahmood_Reza

If the status tests are incorrectly applied (i.e. distinguishing between employed and self employed) then payments made to an individual will be assumed to be net of tax , HMRC will seek to gain tax, penalties and interest. The initial consequences fall on the individual/organisation who obtains the services and not your wife (subject to any counter suing). HMRC will go after the individual providng the services if they operate their own company, and it falls under what is called IR35 (personal service company legislation). Payslips should not be used

pelirocco

The amount she 'earns' the company will include vat , therefore she will get a % of the nett earnings

I know the hairdressers where i go , pay a set wage then a % of takings on top , this doesnt make the hairdresser self employed , its just a different way of calculating pay