what a mucking fuddle

clueless24

Hi Everyone I am posting for my daughter who is in need of some guidance hoping someone can help.
My son in law was working for a friend as a favour for a couple of weeks to help him out and he then offered him permanent work on a self employed basis.
His friend is contracted to a company who finds the work for him and for which he pays them a fee. In turn he has for the past 18 months paid son in law a fixed sum of £250pw S in L registered as SE 18 months ago. (theres was no choice about the wage it was a take it or leave it offer)
The first six months of being SE there was no tax to pay as he had earnt below his personal allowance. Roll on to the next online tax return and it calculates that the tax for the year is £1015 based on an income of £11.5k.
It gets really complicated now as he has been told that he has to pay class 4 NI due to the fact that he has no deductions due to the fact that the friend shoulders all of the allowable expenses, so S in L £11.5k appears to be pure profit. All invoices have friends name on them although sometimes customers will pay S in L direct.
They have sort advise but it is conflicting and confusing, in essence he is paid below the national minimum wage but the NI seems disproportionate.
Meanwhile friends tax bill is in the region of £1k per year and he doesn't pay class 4. He pays S in L £11.5k a year and appears to be able to loose this in his accountancy.
This is the catch if they go to the tax man for advise and the friend hasn't been doing this legitamately this could put S in L job at risk.
Somewhere something is not quite right and they need some help and guidance can anyone help please?

somethingcorporate

Probably best to see an accountant to unravel it all.

clueless24

They are trying to avoid additional costs and the advise they have sort is from an informal friend with accountancy training who has said that any decent accountant will tell you to sort it out yourself as any savings will be wiped out by accountancy fees.
This is there only income they do not claim any benefits and have two small children seems kind of unfair somehow.

chrismac1

At the very least get some free information from local accountants via free consultations! This is not just about fees it is also about risk mitigation.

By definition offering someone permanent self-employed work is a contradiction. Someone genuinely self-employed will not be offered work on an ongoing basis, this is one of the key tests of false self-employment under IR35. A decent accountant will at the very least be able to advise on whether this arrangement is true self-employment and if not, what can be done to sort out that issue.

Moving on and parking up that issue, there is no such thing as a self-employed person who does not have claiimable expenses of some sort or another. So a decent accountant may not pay for his or her fees, but at least will get the tax bill down a bit.

If you or anyone else calls HMRC about this, I recommend doing it anonymously. This guy who has employed your S in L knows he's not really on the right side of tax laws, though if he himself had taken decent advice at the start he could have set it up a lot better than he appears to have done and stayed on the right side of the tracks. Google "IR35" and also search posts on this site for more details about this. Having said this, IR35 is becoming much less of an issue and the tax take from it is a joke in comparison to the public funds spent chasing that tax, plus your S in L is small beer - so even if you call HMRC and they put the wind up you (which they have a habit of doing) relax, in the grand scheme of things this is small potatoes.

clueless24

Thanks for the time you took to answer my questions and we will certainly follow your advise.
Can I trouble you further and ask do you think either my S in L or the friend has done something wrong ie: can they be procecuted or fined. They have a small amount towards the overall bill would the tax man be inclined to let them pay in instalments is this something they would consider.
I appreciate what you are saying about being a small potatoe but when it's happening to you it seems like the biggest thing on earth I know nothing about tax laws and doing this is my way of trying to help them.

CLAPTON

I'm unclear what exactly you're are asking

1. for a genuinely self employed person earning 11,500 then for tax year 2010-11
then tax would be (11,500 - 6475 ) x 20% = 1,005
and class 4 NI would be (11,500 - 5715) x 8% = 462
plus class 2 contribution at £2.40 per week

whether he can claim benefits (tax credits etc) I'm not sure as I know little of the benefits systems

2. it does seem however that he is not really self employed but if he were on that income then he would pay similar tax but more NI.
(again I know nothing about benefits)

3. why is he working for less than the minimum wage; why doesn't he find alternative work?

clueless24

Thank you for your response Clapton
He is unskilled and we live in a high unemployment area trust me, he has tried more than most to find alternative work.
He works on average 70 hours a week and is on a fixed £250 a week and he had to be SE it was that or nothing there was no choice. I think they have been naive in agreeing to this, but whats done is done it's how they move forward from here.
They are both worried sick that either my S in L or the friend has done something wrong and it could lead to them getting into trouble or him losing the job he has.
Thank you for working out the tax and NI it was what they expected via the calculation, and they have saved some towards it, it was the class 4 that has caused problems. Any ideas on how the friend doesn't have to pay it and the S in L does?
Moving forward any suggestions on the best way to deal with the problem?

CLAPTON

without knowing the facts about the friend it's impossible to say whether or not he should or should not pay class 4 NI

from S in L point of view, he is paying the correct tax but maybe paying too little NI (employed people pay 11% rahter than 8% for last tax year ..now its 12% or 9%) but it's difficult to tell whether or not he is self emplyed or not.

if anyone is in trouble it would be the friend who is employing S in L (if indeed he is), but I don't have much knowledge of how HMRC would deal with it.

do they claim all the benefits they are entitled to?
good link http://www.turn2us.org.uk/benefits_search.aspx

chrismac1

There is no crime here, so no prosecution. The friend could be deemed to be your S in L's employer. So then where is the employer's NI he should have been paying, and so on? If anyone is going to get their collar felt by HMRC it should be the employer IMO.

clueless24

Thank you Chrismac
Do you have any thoughts or knowledge on whether HMRC will agree to some kind of instalment plan to pay whats owed?

chrismac1

At this stage nothing is owed. The onus is on HMRC to demonstrate that this is a contract of service - i.e. employment - and not one of services being provided - i.e. self-employment. Without knowing more details about the terms of the contract, written or verbal, and how things are being operated, it's very rash for HMRC, me or anyone else to offer a professional opinion about this. When you see some of the IR35 cases that have gone to the highest courts in the land, the decisions often turn on what might appear to be insignificant operating practices within the contract which can be at odds with what has been written into the legal document.

I see folk every few months who are in a similar position. Unless it is clearly an employment contract, I usually offer guidance on how the people concerned - possibly by making minor changes in the way they run things, possibly by keeping better records, ideally not by having to re-draft the contract - can put themselves beyond the reach of IR35. My personal view of IR35 is that it is very much a dead duck unless the parties make themselves sitting ducks for it! Having been through the pains of IR35 over the past 10 years, most accountants with IR35 "at risk" clients would probably say "Better the devil we know and have more or less beaten into submission" than some as yet unspecified new law in this area....