Tax, National Insurance and Self employed FIs

[orionsbelt]

Tax, National Insurance and Self employed FIs

Any part time FIs out there had any Involvement with the UK tax people over Tax /NI contributions.
ie, being properly registered as self employed, paying the due tax on flight pay and either paying or exempt Class 2 / full contribution.
However the tax people now raising issues re NI and Self employment status.
Any experiences would be welcome

Cheers
Orion

[Field In Sight]

Where have you seen the IR raising issues regarding instructors being self employed?

You have made a good point though!

I work part time as an instructor at the weekends self employed.

Also, currently in the week I work full-time on a 3 mth IT contract and have to pay PAYE plus employers & employees NI contributions due to the IR35 ruling.

However, in March I go back to instructing full-time as an instructor and I can't see the why that would be treated any differently to my current job.

Any views?

FIS

[orionsbelt]

Hi FiS

Have droped you a pm, with more details

Cheers Orion

[Ludwig]

I'm sure somewhere in the depth of pprune this has been done before. Never mind here goes.

This is directly from the Inland Revenue website:

www.inlandrevenue.gov.uk/pdfs/ir56.htm


Employed or self-employed?

Employed

If you can answer 'Yes' to the following questions, you are probably employed.

Do you yourself have to do the work rather than hire someone else to do it for you?
Can someone tell you at any time what to do or when and how to do it?
Are you paid by the hour, week, or month? Can you get overtime pay?
Do you work set hours, or a given number of hours a week or month?
Do you work at the premises of the person you work for, or at a place or places he or she decides?
Self-employed

If you can answer 'Yes' to the following questions, it will usually mean you are self-employed.

Do you have the final say in how the business is run?
Do you risk your own money in the business?
Are you responsible for meeting the losses as well as taking the profits?
Do you provide the main items of equipment you need to do your job, not just the small tools many employees providefor themselves?
Are you free to hire other people on your own terms to do the work you have taken on? Do you pay them out of your own pocket?
Do you have to correct unsatisfactory work in your own time and at your own expense?
End of quote

Frankly from a tax point of view real risk of getting this wrongis with the "employer" as they could very well be done for failure to operate PAYE if you are classified as an employee when they have treated you as self employed. Effectivley the IR will work out what tax and NI they should have deducted in order that you ended up with the net money they paid you. Whether you have paid your own tax on the income is ignored for this purpose. There are also a load of penelties and interest charges that can be levied.

There are a number of good reasons why you might wish to be an employee as there are that you may not!

Unless you only do the odd adhoc lesson for a school or have a contract for services with a number of schools, I don't see that being an instructor for one outfit can ever be self employed, although as an employer I would be delighted if I could off-load all my staff into self employment as it would save be loads of money as I could do away with ho0lday pay, sick pay, PAYE operting staff health & saftely stuff.... the list is endless

[eyeinthesky]

Have you considered setting up a Limited Company? What you can then do, as LTD Co, is contract out your services as a pilot to people who want to use them. You can set your costs against your earnings (use of home as office, mileage, subsistence, insurance etc), and as a LTD company you are liable for the tax, not the flying school or whatever.

It is best is you can sell your piloting skills to more than one school, as then you can show multiple sources of income rather than depending upon just one. If you are able to bill students directly and then pay back the school, so much the better (if this is legal... ?not sure?). Or you could charge them for ground school or whatever.

The company comes under the Corporate Taxation rules, which mean you only pay tax on anything over a PROFIT of £10,000 p.a. You can decide whether to draw a salary from the company, in which case you personally will pay tax on it, or whether to do it in dividends, which are also taxable.

You might also be able to use some of your other skills (I.T?) and contract them out as well to show multi sources of income.

I'm only an amateur at this, and a good accountant should be able to help. Beware of falling foul of IR35, which does not allow you to claim self-employment if you are really only working for one organisation.

[Send Clowns]

Can someone tell you at any time what to do or when and how to do it?This just illustrates how stupid simplistic rules are when applied across a wide range of different areas. Of course someone can tell me how to do my job. The CAA safety regulation group often tell me how to do my job in safety bulletins of various types. I ignore them and it goes pear-shaped iI could be liable. In fact by this list I seem to be employed. However as far as I have been able to find out, as long as it is not my sole employment then I am not.

One problem is I don't think that some employers would like me working for their competitor as an employee. I have not asked mine about that, but they are fine with me being self-employed on the side and tarting myself to whoever has work. How about if I could not work as much because I could not be an employee of two competitors, and thus I reduced my earnings and the tax I pay? I lose money, the school loses business (there is a lack of good instructors in the area), the student can't fly and most stupidly the IR loses tax. What are they on with these rules?

[Gertrude the Wombat]

The Inland Revenue's advice on employment status is ludicrously biased.

It's not their decision - the courts decide whether you are self employed or not, and the Inland Revenue have quite a good record at losing those cases.

Going by the IR's advice is not a good way to get the right answer.

(And going via your own limited company doesn't help much since the advent of IR35 - you've still got to pass the employment status test.)

[homeguard]

The definitions are very complex.


The questions previously qouted are not the whole story. It is true that established tests for self employment do require that you are in charge of yourself and also provide a 'contract of service' and in doing so are not 'directed'. Many of the questions that may be on a general form are designed for the majority of indivduals they encounter daily. Actors, Flying Instructors, Sport Coaches etc very rarely fall into the same catergory and the questions do not apply.

If you were to be paid a retainer and required to turn up at fixed times, even if they were to vary from day to day, in order to perform organisational duties you probably could be considered employed. However most part time Instructors are paid ad hoc and the hours worked are very irregular. The paid by the hour Instructor does take a loss, No fly, no pay! Aircraft goes tech. no fly, no pay! Weather turns turtle, no fly, no pay! And so on. The flying detail varies in duration and so does your cut of the dosh. Also, to point out is that in most cases you will be instructing within the auspices of a 'club' and be restricted by law to teaching other club members, only.

Some years ago the Inland Revenue had a purge in our region of all the Flying Clubs and in particular how Instructors were paid. The generally accepted agreement with them ( the Revenue ) was that they would not challenge the self employed status of Instructors. The club must keep detailed records of what has been paid and to whom they have made the payment.

The Instructor must submit self employed returns. It is always possible by the way to be employed with one organisation on p.a.y.e. and seperately maintain a self employed status for other purposes without the hassle of becoming a Ltd company, which, for most Instructors is too expensive to maintain.

Register with the revenue to obtain a 'Schedule D' number and invoice your club each month for your flying hours and each year submit self employed accounts and you should not have a problem and nor should your club..

All the best!

[orionsbelt]

Thanks Chaps and Homeguard for the details.

I actually do invoice the clubs I work for, have an accountant, am registered as self employed, have submitted business accounts and tax returns and even paid the tax on flight pay.

Re NI am registered as except from class 2 contributions as the flight pay income is under £4500p/a (am retired on pension )
So have satisfied the requirements as set out by Homeguard.

Have also spent the day on the DTI and IR web sites researching
data. Its IR35 that is stirring up the Rats nest.
If we apply the IR test as to employment status we fall midway and I think you need to show that you work for more that one Club

Homeguard I would be interested if you could PM me with any reference info re the agreements reached in your area in the past with the Tax people (without leaving yourself open of course )

Cheers
Orion

[Gertrude the Wombat]

If we apply the IR test as to employment status we fall midway and I think you need to show that you work for more that one Club Might help, might not, but certainly won't be conclusive.

There really is no magic bullet with employment status, with the possible exception of being able to prove that personal service was not required - but even if you can prove you've sent a substitute that doesn't aways shut up the IR.

Those of us doing IT contract work have been dealing with this for a few years now, and have got ourselves lots of systems, insurances and employment status lawyers with the result that we're now winning hundreds of cases for each one the revenue wins. But buying yourself this sort of protection costs money, of course.

And:If we apply the IR test I'm absolutely serious when I say that you don't apply the IR test - that counts for nothing, it's the law that matters, and the law is decided by the courts not the IR. You need to be in a position to pass the tests that the courts apply, then it doesn't matter if the IR test disagrees - you'll win in court, they'll lose.

[homeguard]

I do have somewhere notes on some court cases that 10 years ago or more were often qouted. One I think involved Blue Circle Cement v Someone. I'll try to dig them out. I don't have any written agreements re the approach agreed with local flying clubs I'm afraid. Different tax offices appear to have different points of view.

The previous writer mentioned that the courts decide in the end and that is true but of course there have been so many cases that the precedents are well established. But it is complex, no two circumstances are necessarily the same.

Most of my knowledge on this problem was gained when I was a theatre manager, my old profession. But the parallels are so similar to the flying instructing world in terms of how people are used and paid.

Take for instance an actor. They may for one job be paid not much more than the average weekly wage for a job that lasts some months. The next job could be a film part which lasts only a few weeks when they may receive twice as much as that previously earned working several months. They could have a good year followed by a bad one which is then followed by fantastic success and then have another rotten period of being out of work. Impossible to set a paye code for them. Admin hassles often influence the Revenue as much as law.

An Actor or stage Manager in many cases, will remain on a Schedule D basis throughout quite long contracts of full time employment when working for a relatively small company. But, if I remember it correctly companies like the RSC and the National and the major Opera houses all deduct paye from performers salaries if the contract is greator than a certain length but otherwise are not required to do so. I've worked on telly contracts on a tempory contract paying full paye when an actor I sit next to in the canteen does not. The law is one thing and the custom and practice accepted by the tax man is another.

What you are doing at the moment seems absolutely correct to me. However if you are experiencing some problems, try to grab a friendly lawyer to dig out some case law (Appeals) which are quite brief and extremely lucid in most cases. Try AOPA or GAMTA as well they will probably be well up to date, I should think.

Best of luck

[Ludwig]

It is true that the Inland Revenue merely interpret the law and issue guidance to their inspectors via a variety of manuals. It is also true that the ultimate arbiter would be the Courts, but get real, have you contemplated the costs of getting to the end of the legal line?

One unfortunate aspect of our tax system is that it is not uncommon for similar situations to achieve vastly differing results depending upon the Inspector involved, and if you have the time money and inclination it is often worth arguing the toss to achieve what you want, provided you know what the downside is.

As far as this loss business is concerned, the Revenue are talking about an economic loss, i.e. you have to put your hand in your pocket to fund some shortfall of money in the business, having lessons cancelled due to tech or wx issues is not of itself a loss; all that has happened is that you have not earned any money - different thing altogether.

Suffice it to say that it is each for their own on this type of issue. There is a mass of learned printed works in books and tax magazines (yes there are such things!) on this subject , so get a good accountant, or gen-up yourself, and go argue your case.

Another little stupidity is that you can be employed for NIC purposes but not necessarily for income tax!


Have fun.:ok:

[Whirlybird]

In another life I worked as a market research interviewer. The IR had decided a few years earlier that market research interviewers were employees, and had managed to get that set in stone.

My situation, and that of many others, was ludicrous. I lived in a very rural area, where each company might need an interviewer to cover the area once in a while, but not often. I had some companies I worked for once or twice a week, some once a month or so, some spasmodically, some I'd do one job for and never hear from them again. I was paid on results - sometimes to get a certain number of interviews, sometimes to find certain people, for example owners of luxury cars, where I was paid depending on the "diffficulty" of finding them. A few paid an hourly rate, just to confuse the issue. I took on work which had to be done in a certain timescale, anything from a certain day to maybe within the next month, and organised it myself. At one time I worked for over twenty companies!!!! For each I was taxed under PAYE as though it was secondary to a main job, and I sorted it out at the end of they year. When self-assessment came along, I had to phone up and ask for 20 copies of the employment sheet!!! And I wasn't alone, or even unusual - only interviewers in big cities worked for one or two companies; the rest of us grabbed work where we could find it, and were used to getting phone calls and taking on work from companies we'd never heard of, to never hear from them again once the job was finished. We worked for ourselves, by any standards you cared to mention. But the IR said we were employees.

If the IR ever decides to target FIs similarly, forget the logic or the rules. If they want to make us all employees, then they will.

[homeguard]

I worked for many years on contracts paying standard employee NIC but remained Schedule D. This arrangment was negotiated directly with the Revenue by British Actors Equity after the IR had tried to stop a practice, which had been in place for decades.

The thread here is consistant! Argue your case vigorously and prepare for the arguement thoroughly.

[lady in red]

One of the problems of the self-employed status is the question of insurance cover. As you are not an employee of the company you are not covered by the employers compulsory liability insurance and I have not yet been able to find any insurance company prepared to cover the risks of a self-employed instructor/examiner. By the way AOPA has not been able to either, since the size of the group requiring such cover is deemed too small by the underwriters and one claim could potentially wipe out all the premium income. So in accepting the self-employed status we are accepting the risk as well as losing out on employee benefits such as paid holiday, sick pay, days off, etc.

I would be interested to know how many instructors outside the big companies are actually employed.

[Whirlybird]

Market Research Interviewers never had insurance cover unless they organised it themselves - got discussed occasionally in the event of accidents, attacks on interviewers etc. No holiday pay when I did it; now they legally have to, so you get the silly situation of someone being owed a sixth of a day's holiday or something. Days off happened when we could afford it or the industry was quiet...though in the latter case you usually spent it phoning companies and trying to rustle up work. Sickness pay? Forget it, couldn't afford to be ill.

Yet still we were employees...cos the IR said so, and threatened to take it all the way if the market research companies fought it in court, and they couldn't afford to.

[Gertrude the Wombat]

It is true that the Inland Revenue merely interpret the law and issue guidance to their inspectors via a variety of manuals. It is also true that the ultimate arbiter would be the Courts, but get real, have you contemplated the costs of getting to the end of the legal line? Yes. It's £180.

That's the cost of membership of my trade association and some top-up insurance - it covers initial enquiry up to the commissioners; in the unlikely event of a lose at the commissioners the appeal costs aren't guaranteed to be covered but the case might be taken up by the trade association on its merits. Other trade associations and other insurers offer similar deals. Partly it's so cheap because the Inland Revenue really do lose most of the cases.

[Prophead]

I am in a similar situation with my day job. I get around this by using a payroll company. The website is www.brookson.co.uk

The questionaire they ask you to fill in asks the same questions as the IR one but expands on them a bit more.