This article was first published in Global Payroll Association on 14 June 2018.
The Supreme Court’s decision relating to employment status in the Pimlico Plumbers’ case could have profound tax implications for UK employers.
The case centred on Gary Smith who provided plumbing services to end-users via Pimlico Plumbers Limited but was classed as “self-employed” for tax purposes. Agreements existed between Smith and Pimlico Plumbers, which maintained he was self-employed and in business under his own account. As a result, he was responsible for his own tax, national insurance and Value Added Tax payments.
At the same time though, various contractual obligations meant Smith offered his services personally and could not provide a substitute unless they were another plumber already contracted to Pimlico Plumbers. He also had to wear a Pimlico Plumbers’ uniform and ID badge and be available to work for a minimum of 40 hours per week, among other requirements and obligations.
Pimlico Plumbers provided call centre booking services and charged clients. Smith was only paid his “fee” if clients were satisfied and paid their invoice within a specified timeframe. He was also restricted against competing during and after an “agreement”, and he could be “dismissed immediately” if he failed to observe the rules laid down in the “working practice manual”.
The UK Supreme Court agreed with the original employment tribunal ruling that Smith met the legal definitions of “worker” under the Employment Rights Act 1996 for the purposes of his claim for unlawful deduction from wages, paid statutory holiday under the Working Time Regulations and discrimination as he was in “employment”.
Smith also attested he was not running a business for his own account, or was in other words, not genuinely self-employed. Therefore, his employment claims will now be heard by an Employment Tribunal.
But as Smith is a “worker” for employment purposes, it is also likely that he will be subject to Pay as you Earn (PAYE) Regulations. As a result, tax and national insurance (NI) should have been deducted via PAYE before he was paid – and it is, of course, the responsibility of the payer to assess this situation.
Smith had already paid tax and NI but under self-assessment rules as a contractor who was operating a business on his own account. This means that Pimlico Plumbers failed to operate PAYE correctly, unless prior to paying him, they sought a formal ruling on Smith and other individuals under a similar arrangement.
Even though tax and NI have already been paid relating to Smith’s work, it is – subject to the usual time limits – open to Her Majesty’s Revenue & Customs (HMRC) to pursue Pimlico Plumbers by issuing a Regulation 80 direction for the tax that should have been deducted, together with interest and penalties.
Providing certain conditions are met, HMRC may issue a Demibourne direction to seek recovery of the PAYE liabilities relating to Smith. Doing so would limit Pimlico Plumbers’ liability and credit Smith with the tax he paid under self-assessment, which would mean no further tax is due.
But if HMRC does not make such a direction, the full tax, interest and penalties will be payable by Pimlico Plumbers. The company could respond and argue that any underpaid tax should be the responsibility of employees under Regulation 72 of the PAYE Regulations because it took reasonable care and made an error in failing to operate PAYE in good faith.
The underlying issue here is that the concept of “employment” is treated differently under tax and employment legislation and the tests for determining this status are likewise not identical. The tax world is made up of ‘employees’ and the ‘self-employed’, while in the employment arena, there are also workers, who straddle both concepts.
Unless someone is genuinely self-employed, HMRC treats them as “employees”, so in effect the tax authority lumps employees and workers together. This means that deductions should be made to their earnings via PAYE before they are paid.
Put another way, the possible tax implications of this decision for Pimlico Plumbers, and other companies engaging staff in a similar way, could prove very expensive – as well as provide fertile ground for tax and employment tribunal claims and a nice way for HMRC to swell its coffers.