Getting tax employment status wrong
So far in this section of the website we have explained what tax employment status is and how you can determine the status of your personal assistant (PA).
Remember, it is always better to make sure the tax employment status is correct in the first place. There is lots of information to help you, and you should always keep records of your decision making process so that you can show HM Revenue & Customs (HMRC) evidence that you took as much care as possible. As we shall see later, this can help you even if the ultimate decision you made was wrong.
But what happens if you get the status wrong? This page explains what happens from a tax and National Insurance point of view when tax employment status is wrong.
When is tax employment status wrong?
Who decides if tax employment status is wrong?
What happens in an HMRC check?
What if I have followed HMRC guidance?
What are the consequences of a wrong status?
Unpaid tax and NIC
Can I be held responsible if my self-employed PA does not pay what they owe to HMRC?
Getting help with tax employment status
Tax employment status means whether your PA is employed or self-employed.
To get the status ‘wrong’, means either that you have treated your PA as self-employed when the relationship suggests they should be employed or – more rarely – you have taken on your PA as employed when the relationship suggests they should be self-employed.
In the latter situation (taking on your PA as employed when they should be self-employed), HMRC are unlikely to have any issues with you if you have operated Pay As You Earn (PAYE) unnecessarily, because there is unlikely to be any loss of tax. Therefore you may decide between you to draw a line under the past and just work on the basis of a self-employed relationship going forward.
If you do feel very strongly about retrospectively reclassifying your PA as self-employed, you should speak to the Employer Helpline to get some advice on what to do (you will also have to make sure your PA understands what you are doing, so that they can regularise their position with HMRC as a self-employed person).
If you are dealing with the current tax year, this will probably involve you having to make an adjustment in your Real Time Information (RTI) submission. This will automatically generate an overpayment on your PAYE account which can then be used against a future PAYE bill or be refunded to you (you will then have to arrange to refund your PA the tax and National Insurance deducted from their wages). If you are dealing with an earlier year we suggest you call the Employer Helpline to explain the situation, or you can write to them at:
National Insurance Contributions and Employers Office
HM Revenue and Customs
More information about reclaiming an overpayment of PAYE can be found on GOV.UK.
The remainder of this page explains what happens where you have taken on a self-employed PA when they should actually be treated as an employee. This may have happened because your PA told you they wanted to be self-employed and you did not know the rules, or because you wrongly thought you could choose the status that was best for you and your PA. You may also have simply interpreted your relationship with your PA differently to how HMRC view it.
You may realise yourself you have made a mistake, or it could be your PA who tells you they think their status is wrong. If this happens, you should make sure that you do things like operate PAYE on the correct basis going forward (you can see our setting things up section for more information on how to do this).
You may need to speak to a professional adviser regarding what action needs to be taken to put right the incorrect historic position. (Select ‘I’m looking for tax advice’ and then ‘Employer Compliance or Payroll’ in the drop down box.) This will usually involve contacting HMRC to explain what has happened and agreeing with them how best to correct the situation. Approaching them with an explanation – rather than waiting for them to contact you – is almost always the best course of action as it will help minimise any penalties that HMRC may be entitled to charge as a consequence of the error.
Or, it could be HMRC who prompt discussions with you as to your PA’s status and who then decide the tax employment status is wrong. You may wonder how HMRC would know to contact you if you had not had any dealings with them about taking on your PA? But HMRC may have received a query from your PA directly which led them to question the situation further, or someone may have even called HMRC to tip them off. You may have just been selected for a record check at random. Sometimes such a check is also known as a compliance check or an enquiry. If HMRC approach you and you think it is likely that your PA’s status could be re-categorised, you may want to seek some help from a tax adviser as to how to best deal with the situation. (Select ‘I’m looking for tax advice’ and then ‘Employer Compliance or Payroll’ in the drop down box.)
An HMRC employer compliance officer will probably request a formal meeting with you (usually at your home, although you can instead arrange for the review to take place elsewhere instead).
During the meeting, the HMRC officer will ask questions to ascertain the nature of your situation and to assess the controls and checks that you have in place. You may wish to have an adviser with you during this meeting to lead the discussions with HMRC and advise on any tax technical arguments that HMRC wish to pursue.
The HMRC officer may wish to review specific records, such as any payroll records/records of payments where PAYE has not been operated, worker contracts and employment status tool results. It may be the case that they ask to take these away so that they can study them later back at their office – this is quite usual.
Once the officer has reviewed the situation, they should explain what is wrong (if anything) and instruct you on how to resolve the issue – they may do this by a letter sent after the meeting. If HMRC say that you owe taxes for earlier periods, they should provide you with a formal explanation of the figures that they have calculated. If you have an adviser ask them to check these calculations. An adviser will challenge any findings by HMRC that they feel are inappropriate and try and minimise any liabilities HMRC are seeking to impose.
If, broadly, you agree with HMRC’s findings, you can make a payment on account immediately (even if an exact final ‘settlement’ figure has not yet been agreed) in order to avoid incurring any more interest on unpaid taxes.
If you do not agree with HMRC’s findings, you can appeal. This appeal can be heard at an independent Tax Tribunal. The Tax Tribunal will then make a judgment based on the figures and evidence presented to them.
You can find some high-level information about HMRC PAYE checks on GOV.UK.
You can find some more in-depth information about HMRC PAYE checks in their Compliance Operational Guidance Manual (COG). The manual describes the approach taken by HMRC when reviewing an employer's compliance, for example, how errors are identified, how the extent of the employer's culpability is decided, how the amount of unpaid income tax and National Insurance contributions (NIC) is quantified (including the interest and penalties due) and how a settlement can be reached with the employer.
In our section on deciding the status of your PA we explained that you can use an online tool provided by HMRC or contact HMRC for a written decision about the status of your PA.
If HMRC have provided you with a written decision about the status of your PA, you should also be able to rely on this in the event of any subsequent discussions about their tax employment status.
If you have used the online tool, providing:
- you have answered the questions accurately so they reflect the terms and conditions under which your PA provides you with services
- you (as the engager of the PA) or your authorised representative have completed the tool
- you have printed or saved a copy of the enquiry and results pages
then HMRC say you can rely on the status given by the tool for tax and National Insurance purposes. However, please note our comments about this in our section on deciding the status of your PA. If you ever find yourself in a situation where HMRC say that you cannot rely on the tool, please let us know. Although we cannot give individual advice or case support, we are very interested to hear about your experience of the system.
There are several consequences of getting status wrong:
- Unpaid tax and NIC
The consequences of getting a status wrong can be expensive, especially when you consider HMRC can go back six years for unpaid tax and NIC, interest and penalties in the case of careless behaviour (ordinarily the time limit is four years, however HMRC will probably seek to treat an incorrect status classification as ‘careless’). We explain more about how the amount of unpaid income tax and NICs is quantified (including the interest and penalties) below.
As discussed in our section above, a professional adviser may be able to help you negotiate a settlement with HMRC, to minimise any liabilities HMRC are seeking to impose.
Employers are responsible for collecting tax and National Insurance (NIC) from their employee’s pay when due and sending it to HMRC. This means that if you have not deducted tax and NIC from a PA when you should have done, you will be responsible for making good the appropriate amount to HMRC. You will also have to pay the employer’s NIC, which was your responsibility from the outset.
You will be liable for any PAYE tax and NIC that should have been paid in respect of the employee, assuming the payments actually made to the employee were net of any tax due.
You should also know that interest is charged if PAYE tax and NICs are paid late. The current official interest rate is 3% per annum.
However, there are some rules that might help reduce the amount you have to pay in respect of the employee’s unpaid tax and NIC:
Where you can satisfy HMRC that you took ‘reasonable care’ and any error was made in good faith, HMRC, under something called ‘Regulation 72(5)’ (of the PAYE Regulations 2003) can direct that the tax (and interest) is recovered from the employee. It follows, in such circumstances that penalties (see below) on an employer will not be appropriate. In addition, the employee's NIC liability can be transferred in certain similar circumstances too. You do not have to request or apply for the treatment – the HMRC officer should consider whether a direction is appropriate. You can find out more about Regulation 72(5) in HMRC's compliance manual.
Alternatively, if your PA thought they were self-employed, they should have been paying their own tax to HMRC through the self-assessment system. As such, HMRC can consider making a direction under something called ‘Regulation 72F’. This means that any tax already paid by them under self-assessment can be ‘reallocated’ against any unpaid tax by you as their employer. You do not have to request or apply for this – the HMRC officer should automatically consider whether a regulation 72F direction is appropriate. This can reduce the amount of unpaid tax you would need to pay. Further to this, there are also provisions that allow self-employed NIC already paid by the PA to be reallocated as employee Class 1 NIC, however this will still likely leave you with a balance to pay because self-employed NIC is usually less than employee NIC. Interest should only be charged on the balance after the offset has been made, however, full penalties may still be applicable. You can find out more about Regulation 72F in HMRC's compliance manual.
It is worth pointing out that similar directions can be made, essentially enabling HMRC to recover an under-deduction of tax from the employee, where the employer’s failure appears to be wilful, and the employee was aware of the situation. However, because we assume that any error on your part with regards to the operation of PAYE will be accidental rather than deliberate, we do not consider this option in any further detail on our website.
Penalties are fines imposed by HMRC where a person has not done something they should have. They are generally charged for either not doing something at the correct time, or not doing something accurately.
If you have not been treating someone as an employee, then this means that you will probably not have been:
- Sending in correct employee information/sending in any employee information at all
- Paying your PAYE tax and NIC on time
The level of penalties will normally depend on the gravity of the discrepancy and the degree of co-operation and disclosure from the employer.
A self-employed PA in business on his own account has few statutory rights. Re-categorisation of self-employment status to employment status for tax purposes, could lead to a re-categorisation for employment law purposes as well and could result in claims for holiday pay, minimum wage and other employee rights like auto enrolment. You will probably need to seek professional legal advice should this situation arise.
Self-employed people are responsible for paying their own tax and NIC to HMRC. If your PA is genuinely self-employed (and HMRC agree they are genuinely self-employed) you cannot be held responsible in any way, if they do not meet their self-employment obligations. For example, if for whatever reason, they choose not to pay their taxes and NIC to HMRC out of the payments that you make to them, then HMRC cannot ask you for it.
It is important to distinguish this situation from the one where your PA is not genuinely self-employed and should have been treated as an employee by you. In this case, there could be implications for you – as have been outlined throughout this section.
The key to tax employment status is getting it right in the first place. See our deciding tax employment status pages to help you understand how to get it right.