HMRC Again.....

[mightynimbus]

Rumour is...... an ex FI from Sherburn is turning 'States Evidence' for an HMRC claim that all FI's are actually employed irrespective of apparent self employed status.

Consequences are that flying clubs who think they have self employed instructors will have to pay employers NI contributions going back to god knows when, potentially bankrupting some clubs and rendering it not viable to operate flying training at others, if the HMRC win the argument.

Further rumour is that the former (model aircraft flying) FI has got into a state over unpaid tax and has been offered immunity for his backstabbing activities.

Thanks a bunch buddy, hope you are not planning on working as an FI any time soon (like ever!)

[Keygrip]

I would love to have their contact details - for similar (but not same) reasons.

[mad_jock]

I hope HMRC do prove it.

Its not before time it was nipped in the bud.

And the thought of several well known CFI's in the country doing porrige after ing over their FI's for years gives me a warm glow thinking about it.

I presume it will be the same clubs who charge for FI's getting checkouts before starting work.

And if the FI in question is looking for a job and is unrestricted please PM me and I will put you in touch with an opportunity.

Keygrip he is a member on PPrune if you do a search you will find some huge threads about Sherburn and there dealings with FI's. He recently has had a unfair dismissal case against them as well. I don't know if it was settled in court or outside but there is usuall a no talking thing about it.

Which I might add he would be wise to do on this thread as well.

Just sit back and smile and watch them squirm.

[mightynimbus]

Setteld outside of court on the Tribunal thing

[slamdunk]

Are we missing the point?

Why are "self employed" instructors not concerned about this?? If HMRC win against Sherburn it will create a dangerous precedent. In the current economic climate, I can't see Flying Schools being able to pass on the costs of Employers NI to customers without there being a reduction in overall demand for flying training.

Therefore if overall income to Schools is unlikely to grow a newly defined employed instructor can't earn any more. In fact they might earn 12% less to cover the School having to pay Employers NI. So the same pot of earnings we get now is redefined to cover normal pay, holiday pay, sickness pay etc etc.

Perhaps more importantly - I like to manage my own tax affairs. I prefer to deduct my business associated expenses prior to paying tax, and do not want to be in a situation where HMRC can deduct PAYE/NI at source on gross pay and I have to fight to get it back retrospectively.

If HMRC win, I'm not sure I can afford to instruct as I currently do because I'm sure it will mean I'm paid less and taxed more. Perhaps I shouldn't worry then, because if this forces Clubs like Sherburn to decide they can't afford to run a school it will all be outside my control in any case.

[Legal Beagle]

The basis for this problem is the age-old distinction between on the one hand a contract for services, where services are given on a self-employed basis, and on the other a contract of service, which is employment by another.

There is a lot of stuff about this on the 'Directgov' website, much of it confusing and/or ambiguous, IMHO.

However, I think it is pretty well established now that if you only give your services to one 'employer' you will struggle to convince HMRC that you are self-employed. If that principle has not been applied to instructors before now then it surely will be in the future, because other industries have been stuck with it for some time.

However, if you work for more than one flying school on days and times which you choose, provide your own clobber, essentially manage your own schedule, pay for your own renewals and medicals and are paid your pobblebeads without deduction of tax or NI, then I can't see how HMRC could argue that you were anything other than self-employed.

And yes, it beats me why HMRC should want to have a go at flying instructors anyway. Perhaps they think instructors are a highly paid species? If so then after a couple of investigations perhaps they will get the message and forget about it.

[ewsd02]

Legal Beagle, is it enough to be 'available' to work at other schools, perhaps be checked out and on their books, or would you have to be actively working at more than one school to be self employed?

Agree that once they see what instructors actually earn, HMRC will loose interest and pick on someone else, bankers for instance.

[timzsta]

When I first started part time instructing I got myself an accountant and he told me I needed to register as self emplyed with HMRC and pay NI employment contributions on my earnings as an FI. These came to about £120a year.

Having done my tax return for my second year as a part time FI (working for more than one Flying School) I was advised by my accountant that as my earnings as an FI were below a threshold (which was about £4500 per annum) I did not need to be paying NI contributions on my earnings as an FI! I had pointlessly paid about £250 worth of NI contributions, or about the cost of an FIE fee for my first FI renewal.

I was given a form to complete, which I sent to HMRC, and they wrote back saying I no longer needed to pay NI contributions.

Perhaps the area that is causing the discussion is FI's who are paid some sort of "retainer" by the school they work for? I know some schools do this and it might muddy the water if you claim to be "self emplyed".

As for me personally I have no contract of employment with any of the schools I Instruct at, I have no retainer. I fly when the schools have work and when I want too (usually the same thing though!). I am not allowed to charge for Groundschool. I only get paid once the engine starts and I pay for all my own medicals and renewals. Sounds like self employed to me!

[Legal Beagle]

Timzsta - that sounds like self-employed to me too.

ewsd02 - I'd be a bit worried about that. Better if you can demonstrate that you have actually done some work for the 'other' school.

Of course there are probably plenty of instructors operating on a self-employed basis but only working for one school, and they will probably be ok unless HMRC decides to ask awkward questions. The problem is that HMRC are taking the view that if you only have one 'employer' you can't be genuinely self-employed. Personally I think that is a mis-understanding of self-employment - after all, we choose where to offer our services and how is that principle affected if we choose to offer those services to only one school? - but HMRC's view seems to be the way the law has developed, so it is as well to be aware of that I think.

BTW - No specific legal advice is to be inferred from this posting! (Sorry about that!)

[Lurking123]

I think IR35 is worth looking at.

[ALEXA]

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

[jellycopter]

If this is a real concern then surely schools could 'fix' it by charging for the aircraft rental and the instructor charging each student for his services individually. The school could then charge the instructor a commission for 'finding' the students. Therefore the instructor would be able to clearly demonstrate that he has several clients and is thus self-employed.

You could then liken the case of the instructor to someone who polishes shoes at an airport for example. They pay the airport for the right to use the airport concourse to conduct their business. The polisher gets paid by multiple clients and is thus self-employed.

A bit more paperwork and invoicing required but surely it's worth the effort?

J

[ALEXA]

That would help a lot, particularly if the customer made separate payments to the FTO and the FI. But the practicalities would be a pain, as the FTO would probably want to collect the full amount from the student (how many pay in cash or by cheque nowadays?) and then pay the tuition element of the fee to the FI against an invoice.

The legal relationships between the parties would have to be carefully thought through and stuck to. So the student would need to contract with the FI for tuition and with the FTO for hire. The FTO would have to contract with the FI to act as his agent to collect the tuition fee on his behalf and so on. Since most FTOs charge more for tuition than they pay to FIs, the agreements would have to be structured to take account of this. Not having all of that in well structured legally enforceable written contracts would in practice be fatal.

And the sales literature/website etc. would also need to reflect the arrangements. Easily overlooked. And what about up front fees and students who might use more than one instructor? Can be coped with, but with care.

VAT would also rear its ugly head - the FI probably wouldn't have to register for VAT, unless he is giving a hell of a lot of lessons, so his tuition fee would in theory be VAT free. Good!

That would certainly interest HMRC - there has been litigation in the area in the recent past. Spearmint Rhino Ventures (UK) Ltd v. HMRC was a victory for the taxpayer. HMRC argued that the dancers were acting as agents of the company when they were paid in cash by customers for whatever it was they were doing, so that the company should have accounted for VAT on the payments. Company won. Different facts might give a different result.

So not simple in practice. And easy to mess up over time.

And I'm assuming that none of this would cause a problem under the regs. For example, if for any reason it was unlawful to give tuition under this kind of structure, the whole edifice would come crashing down.

How about doing it completely differently? e.g. having the FTO hire the aircraft to FI? if the FI was genuinely at some kind of economic risk - for example if he still had to pay for that hire even if the student did a no show or if he hired for periods when he might not have students, that might work. But is that practical?!

If it was structured so that he had no real risk - say because he was charged for tacho hours/time flown (so no fly, no hire charge) and he simply inflated his "fees" to the FTO to match his hire cost, so that hours on the ground cost him nothing, then the position would be far less defensible.

It might help if the hiring was not directly from the FTO, but from another company, even in the same ownership as the FTO, as the transactions are far less easily ignored because they are not so "self cancelling".

As for the regulatory issues (if any) on that scenario - ask an aviation lawyer.

This is all a balancing act of competing factors and requires carefull thought. Just signing a document saying that the FI is self employed and will look after his own tax is pretty much useless.

Fortunately for some, HMRC don't act with complete uniformity - their internal guidelines as to employment/self-employment (just look at the HMRC manuals on their website) are interpreted by human beings, not machines, who inevitably will vary in their approach. Some FTOs and FIs will get lucky. Some won't.

But for any already under investigation, all this planning is a waste of time as regards the past. Find yourself a competent account with access to further expertise if needed.

Alexa

[Lurking123]

Alex, some wise words. One thing I have learnt is to be up front with HMRC. When I started down this road I had a very fruitful conversation with a chap in Glasgow. We clarified the nature of my work, allowances, tax relief opportunities for further training, employment status etc. I also piggy-backed my wife's accountant for book-keeping and this has been well worthwhile. I invoice the flying clubs/schools I work for, I keep all receipts and I declare absolutely everything. It is my experience that if one engages with the Revenue, they are extremely helpful. They only become a pain in the bum when they feel you are intentionally trying to avoid them. If someone has been self-employed for a decade or so, has only worked at Timbuktu Flying Club (five days a week) and has never filled in a tax return then ............

PS. To anyone who is instructing self-employed, make sure you have the right level of insurance sorted out.

[ALEXA]

L123

Sounds like you're doing OK. Being up front with HMRC from the start is always the best policy. Doing it after the event can be rather less comfortable!

As you say, the FI with only one customer is in a far weaker position.

For those who are interested - this is the start of HMRC's published guidance on status. There is specific guidance on individual occupations elsewhere in the manual, but FI is not dealt with.

Guide to determining status: overview - table of contents

By the way, I'm aware of one large FTO that has everyone on PAYE. My guess is that they were turned over by HMRC some years ago and are not willing to have that experience again.

ALEXA

[Vortex Thing]

Come on HMRC

ALEXA - A pleasure to finally have someone on the forum who knows what they are talking about!!! FIs have been ripped off and unprotected for years by unscrupulous RTFs and FTOs who know fully well that their "contractors" are actually "employees".

You very correctly pointed out the relevant references within IR35 and yet the forum trend seems to be to ignore the fact that the primary consideration here is that of the liability and relationship of the FTO to the customer/student and most importantly the fact that the FTO own the aircraft.

It is clear that FTOs/RTFs are not acting as agents of the FI/TRI. This in my view is inescapable and any attempt to change the status quo by the FI renting the equipment ala the shoe shine example would be defeated as the HMRC would simply see it as trying to put substance over form.

The facts are pretty simple. FIs are highly UNLIKELY to be able to convince HMRC that they are self employed and rightly so IMHO.

FTOs and RTFs get over it. If you want to run a business one of the main costs is staff and in this sort of business you want professional, well trained staff. Pay them a salary or admit that your business is not financially viable. Just because you (the school) may not earn any revenue due to bad weather, changes in the market does not give you the right to shift all the liability to your 'employees'. If you owned a shop and bought loads of stock and the market conditions changed your footfall and nobody bought your stock it doesn't mean that you can not pay your staff.

I hope the HMRC wipe the floor with the FTOs and RTFs in this country that refuse to stand up to their responsibilities and salary their FIs preferably for what they are worth.

If this means that some schools close and that there is less work out there then at least that work will hopefully give some instructors the ability to earn a real living as professional instructors as opposed to lots of instructors earning barely enough to feed themselves. I'm with mad jock on this I hope the HMRC gives them a wake up call and that some of them even go out of business. After the fall out the GA market will be a smaller but better place for FIs to work. It isn't all about giving the cheapest product to the general population if the general population cannot pay what it really costs to have professional instruction then they shouldn't fly.

[tropicalfridge]

All sounds great in principle, but is that really what flying schools need at the moment with most of them suffering from the credit crunch? Wait until a better time, then force them to pay their instructors properly.

[belowradar]

I think that tax rules should be enforced properly and consistently across the board regardless of industry or credit crunch.

[ALEXA]

Can't disagree with that as a statement of principle.

Call me an old cynic, but in my experience, there will always be one law for the rich .....


Alexa

[belowradar]

Good point Alexa

Wealthy people can hire very good accountants and tax advisers but then again that could be a chicken and egg comment "which came first the expensive accountant and pots of money or the business like attitude ?"