A tax professional writes .....
Hope the following helps guys:-
The distinction between employment and self-employment is not simple. it depends on the facts, which can vary an awful lot. There is in theory a balancing exercise between competing factors, but HMRC tend to give much more weight to the factors that help them. As regards FIs, I'm afraid that they do hold most of the good cards.
How much economic risk the individual has is currently a popular test for deciding between employment/self employment, but the courts have flirted with other (not very satisfactory) tests over the years.
So if you provide your own equipment etc. that's a good start. It will have cost you something and you might run the risk of loss.
Against that, the biggest piece of equipment (the one with the fan) is not provided by the FI. Bad. Nor is the cost of running it.
Don't fall into the trap of thinking that high skill level = independent contractor = self employed. The surgeon who works 4 days a week for the NHS and one day privately will be an employee 4 days of the week and a self employed surgeon for 1 day.
And HMRC will often say that a self-employed individual should usually be able to provide his service by means of a substitute, because that shows that it is the service that is important, not just the identity of the person providing it. You can see the obvious problems for an FI. Same with a surgeon.
The degree of autonomy in planning and conducting lessons can help, but FIs may have difficulty showing that they have much freedom to plan lessons, given that the syllabus is prescribed by someone else.
But please take this point on board - you do not become self employed simply because you offer (or deliver) your services to more than one flight training organisation. The key question is always the relationship between the individual and each organisation. Is that relationship an employment or a self employment? A person who works as a casual for three different companies a week may simply be an employee of all three. It depends on the facts.
It does not in theory make any difference that the person has "signed on" as self employed or registered for VAT. HMRC may make a "discovery" that the facts do not support self employment as regards any particular relationship. Discovery powers are not unlimited, but they are wide enough.
But please get this into perspective. HMRC are after three things here. The main one is National Employer's Contributions (NICs), principally employer's NICs at 12%, which is a payroll tax on employers, not a deduction from "wages". They also get penalties from the employer for getting the PAYE documentation wrong (which can mount up). They also get income tax.
Since the "recategorised" FI will presumably be paying tax on a self-employed basis, HMRC will do better if they can extract "arrears" of PAYE from the FTO, because, of course, the FI will have been paying less tax as a self employed individual than he would suffer under PAYE, unless he or his accountant is an idiot.
In an investigation, HMRC may agree to collect the difference between the tax that should have been deducted under PAYE and the tax that the FI has himself paid, but they are not obliged to do this. They can collect the lot from the FTO, which would usually entitle the FI to a refund of the self-employed income tax he had paid.
If the FI has not signed on to the system at all, the position is inevitably weaker.
You see the picture? Initially it is the FTO that will suffer for failing to deduct PAYE and NICs. Obviously, there is a knock-on effect as regards the solvency of the FTO, its dual rates to students and what it will be prepared to pay its FIs in future.
Nobody goes to prison in any of this - it's almost always dealt with as a purely civil matter.
One area to watch for FIs is where the employer goes bust without paying the NICs or PAYE. The PAYE regulations permit HMRC to go for the "employee" instead in certain circumstances. They usually only do this where the employee was a director, which is unlikely to be relevant here.
Best of luck chaps.
Alexa