Tax Inspection Coming and Freelance Workers Concerns

Irn_Bru_3

Hello everyone,

I have been a long-time lurker on the forums and find all your advice very useful (thank you!) but on this occasion I can't find the info I am searching for so hope someone can help me. We do not have an accountant, and self certify our tax records, accounts etc.

sorry for the long post but I wanted to give as much background information as possible to help with my query.

For the past 3 years I have run a small events business with 2 other partners (partnership), and occasionally, when it is a larger-scale event or when there is entertainment to be provided for example, we hire workers (technicians, musicians, film crew, actors, catering staff etc) to help us out on a one-off basis.

One of the other partners keeps the books for our business. She assures me that it is okay to simply pay the workers (by cheque usually, though occasionally in cash) and assume that they are paying their own tax and national insurance as they are "self employed", and that although they don't sign anything to say they even receive the money from us, as they are being paid by cheque we have a record that they are being paid and this exempts us from paying employers NI, PAYE etc.

However, I am not convinced that this is indeed the case. Over the past 3 years we have had about 20 different people doing work for us, some just once but others on several occasions. I have checked the HMRC "employed or self-employed" guidelines but can't really come up with a clear answer as the situation differs with each job.

Generally, the staff are hand-picked by us depending on their experience, skills, and availability. They do not need to accept the work, but if they do and then cannot do it for whatever reason, WE would find a replacement (they couldn't just send someone in their place, although we will take recommendations if we are struggling). They do not need to supply any equipment or tools (only occasionally costume for actors, but if it is something specific that they wouldn't generally have readily available we would supply it), and we tell them what time they should start and finish, and where the work needs to be done (usually at a particular venue). The work is not regular, as mentioned some only help out once but others several times over 3 years, and the hours are not fixed. They are paid only if they are asked to work, and don't get paid if they are on holiday, off sick and so on; pay rates are set by us (using Industry Standards) and are not negotiable (though admittedly no-one has ever tried to negotiate the pay rates!)

They do not invoice us, and have not completed anything in writing declaring they are self employed or anything. We do not give them payslips, just a cheque, and we complete a document (they don't sign it or anything) detailing who was paid, how much, when and what for, which we file with our accounts payable.

Many are students and so would not be eligible to pay Tax/NI anyway, but a few are working and quite frankly I don't think they will declare the income to HMRC.

I am really concerned that the upcoming tax inspection will land us in a lot of bother as this will not stand up to HMRC's demands. Should we treat these individuals as employees from a tax point of view, and let HMRC know they are being paid, sending off employers' forms etc regularly (even if there is no tax to be paid), or is it right that they are indeed responsible for their own declarations and as such we have nothing to be concerned about with the upcoming inspection?

Foolish it may seem to others, but I assumed everything with the company's financial records was fine as the individual responsible provides monthly accounts for us to see, bank records are readily available online and so on, and my business partner used to work for a large financial organisation. However, since we got the letter about the upcoming inspection (in about ten days time) we have been discussing various matters and it was an off-the-cuff comment that brough these concerns to light, and I have been extremely worried since! The third partner is on holiday at the moment and as such knows nothing of this, I don't want to worry them unnecessarily.

Is it a good idea from now on to have individuals sign a declaration that they are responsible for their own tax/NI and that they understand we will pass details to HMRC if requested?

Also, if HMRC do decide that we have not complied with their regulations (we have full records of everything being paid to individuals from when the business began, we have just never passed it on to HMRC), what is the likely course of action? does anyone have any advice?

Also, it may or may not be relevant but the total sum paid out to the 20 individuals totals just over £11,000 for the 3 years.

Thanks very much everyone

SG.

Horace

If you are a member of the Federation of Small Businesses then get in touch with them because you have automatic cover in case you are inspected by the tax man.

Never assume that someone is self employed - if they are self employed then they will invoice you. If you hire entertainers for events (I often do this) then the entertainments agency or the entertainers themselves will send you an invoice which you then pay - it might be that you have to pay a 50% deposit and the agency used should say whether or not you pay the remainder to the artiste or whether you pay the agency on the night that entertainer performs.

You are also responsible for your company's finances. I too am in the events business and if I use particular caterers for an event they will send me an invoice same goes for entertainers, venues, sound engineers etc. They are being employed on an adhoc basis and they are free to work for others. So what I am saying is that the firms concerned should raise an invoice to you for their time - you then pay it and you raise an invoice for your client for whatever price you have agreed to charge for the event.

If you are hiring students to work for you then the HMRC will class them as employees and it is wrong to assume that they are self employed, especially if you are employing the same student year on year for events.

I must admit that I make a point of not paying people in cash - I will always pay by cheque or bank transfer, paper trails where cash is concerned are not so easy and I like to have everything above board.

If your records are not up to date then you can be fined and the HMRC are very hot on this at the moment and can fine you thousands of pounds.

FatAndy

Irn_Bru wrote: »

Many are students and so would not be eligible to pay Tax/NI anyway, but a few are working and quite frankly I don't think they will declare the income to HMRC.

I am really concerned that the upcoming tax inspection will land us in a lot of bother as this will not stand up to HMRC's demands. Should we treat these individuals as employees from a tax point of view, and let HMRC know they are being paid, sending off employers' forms etc regularly (even if there is no tax to be paid), or is it right that they are indeed responsible for their own declarations and as such we have nothing to be concerned about with the upcoming inspection?

There's some guidance on the HMRC website - http://www.hmrc.gov.uk/paye/employees/start-leave/special/temps.htm

You'll probably need to register as an employer (it doesn't cost anything to do this) - http://www.hmrc.gov.uk/paye/intro/get-started.htm

paddyrg

I think you may find yourselves completing a Section 16 sheet every year. If the workers are genuine freelancers (eg TV cameramen) and not just called 'self-employed' to try to avoid tax (eg cafe chefs who 9-5) then the Section 16 is how HMRC tie your accounts back to those of the contratcor, and check everything is getting declared.

vax2002

Always ask for an invoice containing a valid National Insurance Number.
If they can not provide this,, deduct tax at 30%
Because you will be paying it !

Emmamumof2

Whenever I have utilised freelance services in my business in the past they have always provided an invoice, Ive paid via cheque or bank transfer to keep a trail and they've issued a receipt for payment which may seem like overkill but it covers all basis'. Sadly, havent needed freelances for quite some time due to the downturn!

You say you are worried about the upcoming tax inspection - have HMRC written to you to say they are to investigate the business?

Savvy_Sue

vax2002 wrote: »

Always ask for an invoice containing a valid National Insurance Number.
If they can not provide this,, deduct tax at 30%
Because you will be paying it !

How does a NINo help with this? Is it just so HMRC can chase the non-employee?

vax2002

It proves the person you paid exists as they should be gaitered for self employment NI contributions, the tax office can trace them via a national insurance number.

Mistral001

Savvy_Sue wrote: »

How does a NINo help with this? Is it just so HMRC can chase the non-employee?

I agree. HMRC will not be impressed by this way of working and I should think the employees/ self-employed will not be too impressed either. Name and address on the invoice yes, but NINo. no. If you suspect that some will be giving false addresses or even names, then ask for proof of identity. If they send in invoices they know that you will be submitting them with your accounts for tax purposes and if they fail to notify HMRC of any taxable income it is on their own head.

The HMRC guidelines puts the resposbility on the employer to determine whether the people they are employing are self-employed or employees, so asking people to submit invoices when they are in reality employees is dubious in in case.

Irn_Bru_3

Thanks to everyone for all the advice and comments.
I have done a bit more digging; the majority of people, who do work for other companies as well, have been invoicing us for the amount due to them so it looks as if this is all okay - all but one has a VAT number on it so I assume this means everything here is above board. However there are about 9 individuals who are either students (who work part time, e.g. in bars, shops etc so I assume PAYE) and full time employees of other companies (again PAYE, I assume) who are paid as I described in my post. All but one has been paid by cheque. We know everyone's name, address and telephone number but have no NI numbers.
We had a letter from HMRC saying someone would visit to "review our records" next Friday. It was sent directly to the business partner who does the books and files the VAT returns, partnership tax returns and so on.
I think this might be the final straw for me. Business is struggling anyway and the margins are shrinking, and there have been various underlying issues for a while. I have just been offered a promotion by my day job which involves a move to another city so I think I might just take it - my initial thought was no but I am at my wits end with all of this, I haven't slept properly in about a week, so I think the time has come to call it a day. Assuming we don't end up in jail for tax fraud that is....

Mistral001

Irn Bru

I would stick it out and not give up. You will learn a lot about tax and how to run a business just by seeing it through. If that means turning down the offer of the job or delaying it, I think it would probably be worth it.