A change being made to the VAT Flat Rate Scheme on 1 April 2017 will force many businesses to leave the scheme.
A business that employs only part time or casual staff may need to be registered as an employer with HM Revenue and Customs (“HMRC”) and operate Pay As You Earn (“PAYE”) on the payments it makes to these staff.
There are, however, some limited circumstances in which an employer of part time staff may not need to comply with the often onerous requirements of PAYE.
Are My Staff Actually Employees?
What might seem to be a fairly strange question to be asking should always be considered first, as PAYE only needs to be operated on payments you make to your employees.
If the person supplying their services to you is not considered to be your employee, PAYE does not need to be operated and you can make all payments to them without deductions. This would be the case, for instance, if the individual was self-employed.
In most cases it should be clear whether someone is your employee or not, but where it is unclear you must consider the nature of the working relationship that exists between that individual and your business.
Characteristics of a working relationship that would point towards the individual being an employee would include:
- they have some kind of contract of employment,
- they are unable to refuse to work when required to do so,
- they exercise little control over their day-to-day tasks when at work,
- they are not expected to supply their own equipment, and
- they are not allowed to send someone else in their place should they wish to do so.
Not all of these characteristics need to be present to conclude that someone is an employee, but if most of these apply, then this is likely to be the case.
It may be tempting to try and always argue that your part time workers are self-employed rather than employees of your business, but HMRC will always look very carefully at the underlying circumstances and getting it wrong could be an expensive mistake.
Where you have any doubts, there is a very useful page here on the HMRC website where you can use an online checker to get a good indication of whether or not someone should be considered to be your employee for tax purposes.
My Workers Are My Employees
If you have determined that your part time workers are indeed your employees for tax purposes, the next step is to consider whether your business must actually register as an employer with HMRC. Only those businesses that are required to register as employers need to apply PAYE to the wages and salaries of their staff.
You must register your business as an employer with HMRC if any of the following conditions apply to just one of your employees:
- you pay them more than £120 per week (2020/21 tax year),
- you pay them expenses/benefits, or
- they are in receipt of a pension or have another job;
You must also register as an employer if you will be using subcontractors under the Construction Industry Scheme.
If none of the conditions apply to any of your employees then you do not need to be registered as an employer for PAYE purposes; but if you get this wrong and fail to register when you should have done so, HMRC are likely impose financial penalties on you.
I Don’t Need to Register with HMRC
If you have employees, but are not required to register as an employer under the above rules, you do not need to operate PAYE and any payments you make to your employees can therefore be made gross.
No specific reports or returns need to be sent to HMRC concerning these payments, although you must still keep adequate records yourself detailing what you have paid to each employee.
You must be able to demonstrate to HMRC, if required, that you have checked with each of your employees that they are not receiving a pension or currently have another job. If you haven’t checked, then you cannot be sure that the third condition above doesn’t actually apply.
It may be advisable to require all members of staff to sign a simple declaration stating that they have no other job and are not receiving any pension income.
Remember that other legal requirements relating to the employment of staff, such as minimum wage legislation, continue to apply irrespective of whether you need to register as an employer for PAYE purposes.
I Need to Register with HMRC
Where you are required to register as an employer with HMRC, you must do so before you begin paying any of your staff.
HMRC will allow you to register up to two months before this date.
Once registered, there are numerous obligations under PAYE that must be met, including:
- the requirement to inform HMRC when you take on a new employee and to obtain a tax code for them,
- the requirement to deduct the correct income tax and national insurance contributions from all payments you make to your employees,
- the requirement to submit Real Time Information (“RTI”) payroll reports online to HMRC every time you make a payment to your employees, and
- the need to provide your employees with payslips.
It should not be underestimated just how onerous these requirements can be, in particular the need to submit RTI reports every time you make a payment to your employees.
You will need to operate PAYE on the payments you make to all of your employees, not just on those whose pay or circumstances caused you to have to register as an employer.
What If I Fail to Register?
Whilst there is no specific penalty imposed for failing to actually register as an employer on time, you are instead likely to be caught by the penalty regime that covers the late submission of RTI reports.
Every time a business pays its employees, the requirement to submit RTI reports to HMRC falls not just on registered employers but also on those who should have been registered but have failed to do so. Accordingly, where you have failed to register as an employer by the required date, HMRC will now consider that you are late submitting any RTI reports that you should have submitted had you registered on time. HMRC may then impose penalties for the late submission of these reports.
The penalties imposed for late submissions operate on a tax year by tax year basis. The first late submission of an RTI return in a new tax year is penalty free, but after that point each late return attracts a fixed penalty as follows:
|Number of Employees||Monthly Penalty|
|1 to 9||£100|
|10 to 49||£200|
|50 to 249||£300|
If you are over three months late, HMRC can also charge an additional penalty of 5% of the tax and national insurance that you should have reported.
From 6 March 2015 to 5 April 2017 HMRC gave a three-day grace period before penalties were imposed. It appears that this grace period has now ended.
New employers are given an additional 30 days to file their first RTI report.
In addition, HMRC can also charge penalties on any late payment of tax and national insurance that should have been made, and on any errors within the RTI returns.
Given the steep learning curve required to ensure full compliance with PAYE obligations, it can often make sense to employ an external party to undertake your payroll functions for you. You can send them your pay data electronically, they can then process your payroll, submit all required RTI reports and create electronic (or paper) payslips for your employees at a relatively low cost.
A Final Point
This article is only intended to give a brief overview of the tax implications of employing casual or part time staff. There remain many other legal requirements to consider when taking on employees, such as minimum wage legislation, rights to work, workplace pensions, etc, and these are not considered here.