employment view

October 2006

 

no credit for tax paid

It is fairly well know that companies can be faced with unfair dismissal claims from individuals they did not realise were their employees. It is less well known that companies can be liable to pay all the income tax and national insurance they should have deducted from such individuals’ pay, without receiving any credit for tax actually paid by the discovered employees.

who is an employee?

Some individuals who are nominally ‘self-employed’ may be classified as ‘employees’ if the criteria for an employment relationship are met (see below). If so, they will acquire unfair dismissal rights after 12 months.

A typical scenario is this: an individual has worked for a company for more than 12 months as ‘self-employed’; the company decides the individual is no longer is required; the company does not suspect that the individual is an ‘employee’ in law, so simply terminates the arrangement without going through any of the procedures it would usually adopt if it was terminating an employee. The individual then claims unfair dismissal, and an Employment Tribunal usually arranges a pre-hearing review to determine whether the individual was an employee or not.

The Courts and Tribunals have developed a set of guidelines which are now fairly standardised to decide upon whether an individual is or is not an employee. The key factors that would have to be present for an individual to be an employee are:

(1) a contract of some type between the parties and

(2) an element of control over the individual’s work and

(3) some ‘mutuality of obligation’ and

(4) an obligation for the individual to perform the work personally.

If all these factors are present, the employee maybe an employee: the tribunal then go on to look at a number of indicators before they decide, such as:

- does the individual take financial risk?
- who provides equipment?
- is individual integrated into employers business?

If at the conclusion of the pre-hearing review the individual is found to be an employee, the case will be listed for a full merits hearing at some later date to decide whether the individual was unfairly dismissed. The employer, not having followed a proper disciplinary procedure, is very likely to loose.

PAYE and NI

But the decision that the individual was an employee (and not an independent contractor) may in itself be expensive for the employer. As the individual was an employee, then the employer should have been making deductions under the PAYE regulations for income tax and national insurance. HM Revenue & Customs may well try to recover the sums that should have been deducted. In many cases the individual will have been paying tax as a self-employed person Schedule D. However, the tax actually paid by the individual will not go to reduce the employer’s liabilities to HMRC under the PAYE legislation.

Demibourne v HMRC

This was well illustrated in recent decision by a Special Commissioner, Demibourne v HM Revenue & Customs. Mr Bone and his employer genuinely believed he was self-employed. For some 10 years after he retired, Mr Bone continued working for his old employer on a ‘selfemployed’ basis, provided invoices and receiving pay gross. He completed annual accounts and paid his own income tax. The Revenue claimed that he was an employee rather than self-employed. This was upheld by the Special Commissioner on the basis that his terms and conditions of working had changed little following his ‘retirement’.

The Revenue then claimed back tax and NI from the company: they claimed the full amount, not giving credit for the tax which Mr Bone had actually paid. This was also upheld by the Special Commissioner. Although he suggested the Revenue give credit for tax already paid, he had no power to order that they do so.

This decision makes it very clear that HMRC can recover tax twice in a situation where an individual has been paying tax (wrongly) as a self-employed person. If a settlement is reached with HMRC the individual may be able to recover his own payments of tax in subsequent years; however, sometimes the payments will date back too far and the employee will have lost the right to claim back previous overpayments: regrettably, this was the
case for Mr Demibourne.

Of course, this is yet another good reason for employers to be very careful about having individuals working in the workplace without being entirely clear about their legal status.

 

tax on termination payments

Another recent decision by a Special Commissioner, SCA Packaging v HMRC, is helpful in relation to tax on termination payments. The first £30,000 of a termination payment is generally tax free, but only if the termination payment is not taxable under the usual income tax rules.

The usual income tax rules provide that if any payment is made by an employer to an employee under the contract of employment, it is taxable in full (ie no £30,000 exemption). So if a written contract of employment gives the employer the express right to make a payment in lieu of notice, any such payment will generally be fully taxable.

In recent years, HMRC have been taking a tougher approach to tax on termination payments. They have taken the view that even if there is no written payment in lieu of notice clause, an employer may nevertheless have an implied contractual right to make a payment in lieu of notice if he has a custom and practice of making such payments.
The Special Commissioner in the SCA Packaging case decided that the fact that the employer habitually makes termination payments does not necessarily make them fully taxable.
 

In future, similar cases are likely to turn on their facts. It will be very helpful to show that termination payments have been negotiated individually rather than following a standard practice.

 

drug and alcohol policy

“The possession, use or distribution of drugs for non-medical purposes on Company premises is strictly forbidden. Any employee in a safety-critical job who is found to be under the influence of drugs or alcohol will face disciplinary action on the ground of gross misconduct under the Company’s disciplinary procedure.

If the Company suspects there has been a breach of the prohibition on alcohol or substances, or an employee’s work performance or conduct appears to have been impaired through substance abuse, the Company reserves the right to require him to undergo a medical examination.

The Company reserves the right to search employees or any of their property held on Company’s premises at any time if there are reasonable grounds to believe that the prohibition on substances is being or has been infringed.

An employee may choose to seek help on a completely voluntary basis. [nominated manager] is available to initiate such help if required. If the employee requests assistance voluntarily prior to management being aware of poor work performance or misconduct, the matter is confidential.

Help under this policy does not apply to anyone who, because of drug or alcohol misuse, behaves in a manner contrary to the standards of conduct required by the Company. Such behaviour will be dealt with in accordance with normal disciplinary procedures, until subsequent investigation has taken place, and the appropriate route decide upon.”
 

The above is a very brief version of a drugs and alcohol policy. Like most policies found in staff handbooks, it has a great benefit for employers, even though it is also of help to employees.

Employers face a number of serious legal risks from the use and abuse of drugs and alcohol by their employees. Employers have duties to take steps to look after the health and safety of their employees. Moreover, they can of course be vicariously liable for injuries and accidents caused by their employees who are under the influence.

Employers can be responsible for the actions of their employees at ‘after work drinks’, office parties, and functions at clients’ premises. And these are often the circumstances in which acts of harassment and discrimination take place.

Under the Misuse of Drugs Act 1971 it is an offence to allow the production, supply or use of drugs on any premises. Many employers try to create an environment where individuals with problems are identified. If an employee self-refers he can be referred to appropriate sources of help. It is perfectly possible to construct a programme that does not require the employer to pay any money at all.

However, if an employee does not self-refer, but his drink or drug problem is revealed during disciplinary proceedings, then the disciplinary proceedings will take their course.
or comprehensive guide, but it is a reminder of some of the key steps that are required, no matter how gross the misconduct.