Flying schools going tits up.

[mad_jock]

http://www.pprune.org/flying-instruc...mrc-again.html#

As can be seen on this thread the tax man is taking a challenge to court about the employment status of flight instructor. In a dispute with Sherburn Aero Club and an FI.

It has been a practise for years that some people try and avoid paying employers national insurance. To this end some schools forced FI's to work self employed and to be fair some FI's wanted this arrangement as well.

You might think why does this effect me?

Apart from those clubs who will go out of buisness taking with them any money on account. Some clubs are set up on a charity basis where each member is liable for a share of it debt's.

I will let ppruners who have more knowledge of law to comment on this.

But watch out if they win and they have a witch hunt around flying schools I can think of a fair few there are going to be tears before bedtime.

[IO540]

You should be OK, MJ, because in any scenario where HMRC determine that a "self employed" person was in reality an employee, it is the case that the alleged "employer" was deemed to be deducting PAYE.

It is therefore the employer who gets done by HMRC for the money they are deemed to have deducted.

This is the standard trap for employers who use long term subcontractors. If the subcontractor status of the person is disallowed by HMRC, the chap can just smile and walk away, and the employer gets done for the deemed deductions.....

At least I hope I understand you correctly (an employer of all kinds of people for over 30 years).

[julian_storey]

I guess a flying school / club should be no different from any other kind of business though.

If an instructor works EXCLUSIVELY for one school / club on a 'self employed basis', then a 'master and servant' relationship will exist. In this situation, HMRC will try to argue that that the relationship is in fact 'disguised employment'.

On the other hand, if an instructor works on a self employed basis for a number of people, he / she is genuinely self employed and HMRC can then have absolutely no issue with the arrangement.

[mad_jock]

I know I am OK. I was always employed on PAYE. But had a couple of discussions with CFI's who had definite views about FI's had to be self employed or they weren't getting a job.

The reason why I posted this is because there could be a fair few schools go tits up due to the employer having to pay back payments and interest.

Its worth while students checking out how thier school is set up and flying balances off pretty quick if they have the self employed FI set up.

The clubs that are charitable there members could end up with a nasty bill.

[r44flyer]

I think it's about time there was some clarity on this situation, as from what I've been told in the past HMRC has largely ignored it. I think it's quite common to find self employed instructors contracted to just the one school.

Unfortunately, forcing instructors into employed status means money for NI payments etc will either drive down the salary of the FI or drive up the cost of rental, neither of which is a welcome idea right now. Margins at some flying schools are tight enough so I can't imagine they find it easy to absorb these new costs if PAYE is new to them. Some might well be in trouble.

[dublinpilot]

It's not just the employere NI.

There is an administrative cost in operating a payroll, especially where the hours vary, and those calculations have to be done for each payment.

[r44flyer]

True.

I hope no one starts flying for peanuts if it gets even worse than it already is.

[mad_jock]

I would disagree Dublin.

I used to do the wages for my ltd company which had 6 of us using it while contracting.

Each run takes 5 mins per person to enter it through the sheet and run the tables. Then 10 mins at the end writing all the cheques and envelopes. This went down to 1 min per person and 5mins for the cheques after I knocked up a spreadsheet and got printable cheques from the bank.

I will admit you do get people out there who make a living off making out payroll is difficult and alot of work, it isn't.

Mind you its a very common excuse thought for flying schools who don't want to pay NI contributions.

And it makes a huge difference to the FI with state benefits.

Also I have heard the minimum wage unit are looking at a few schools as well.

[IO540]

It comes down to whether the school wants to have employees in the legal sense.

Employees can be great or they can be dishonest, or all in between.

After 1 year you cannot just sack somebody. You can make them redundant but you have to abolish the position which means it cannot be filled for some (long) time. There are ways around it but they involve subterfuge like "reorganisation".

You can be sure the person is still in touch with friends in the company and if you make it possible to get sued the required information will find its way back to the ex employee and he will pop up at the Tribunal.

So there are excellent reasons for having SE people because they can be fired anytime, but equally if the work genuinely exists then it is a great solution for both parties.

HMRC attention varies widely and I've seen some amazing lapses of their attention, but also the very opposite.

Anybody using SE contractors should do the following

- get absolutely proper invoices from them
- make sure they bring their own equipment (PC, slide rules etc)
- pay them like normal trade suppliers (30 day terms)
- offer NO job/work guarantees of any kind whatsoever
- terminate the contract every few months, for a few weeks

and the list goes on; it's a well worn topic.

I should think that flight instruction is a perfect area for SE instructors because the workload varies so much.

OTOH the instructor has to make a living too so if he doesn't get enough dosh overall he will seek other employment......

[bigfoot01]

I don't think it's quite that straightforward. In my industry, there are examples of people doing this, in order to 'avoid ' tax. It goes like this, you pay your self up to the lower rate limit and then take the remaining money from the company as Dividends, (assuming you make this much). Hence you avoid paying higher rate tax (it used to be a bit better than that, but increases in captial gains taxes have wiped that out). You can also claim expences, e.g. if you are office based mileage to and from work; headphones; books; parking; etc. which are essentially tax free.

Another interesting one is where you pay an otherwise unworking partner to do secretarial work or similar to support your business, taking advantage of a tax free allowance.

Those nice people Customs and Revenues don't really like either first scheme where the person looks like an employee. E.g. single predominant source of income; working in the same role for more than 2 years; no contract, or a contract that looks like an employment contract. The sancation is they usually assume no more than 5% expences and the remainder is payed as direct pay, attracting PAYE; and both NI's. I suspect with the high training costs and potential around VAT losses, they will be looking at this area. During times of recessions, they tend to get very excited about enforcement...

The partner approach, they get suspicious if the partner does not seem to bring in money or direct value cannot be found in the work. I think they recently lost a case on this, but I know it is an area causing people concern...

I think they can also go back 7 years!

[IO540]

I don't think it's quite that straightforward. In my industry, there are examples of people doing this, in order to 'avoid ' tax. It goes like this, you pay your self up to the lower rate limit and then take the remaining money from the company as Dividends, (assuming you make this much). Hence you avoid paying higher rate tax (it used to be a bit better than that, but increases in captial gains taxes have wiped that out). You can also claim expences, e.g. if you are office based mileage to and from work; headphones; books; parking; etc. which are essentially tax free.

Another interesting one is where you pay an otherwise unworking partner to do secretarial work or similar to support your business, taking advantage of a tax free allowance.

Those nice people Customs and Revenues don't really like either first scheme where the person looks like an employee. E.g. single predominant source of income; working in the same role for more than 2 years; no contract, or a contract that looks like an employment contract. The sancation is they usually assume no more than 5% expences and the remainder is payed as direct pay, attracting PAYE; and both NI's. I suspect with the high training costs and potential around VAT losses, they will be looking at this area. During times of recessions, they tend to get very excited about enforcement...

The partner approach, they get suspicious if the partner does not seem to bring in money or direct value cannot be found in the work. I think they recently lost a case on this, but I know it is an area causing people concern...

I think they can also go back 7 years!

I think there are some misconceptions in your post, bigfoot.

First, dividends don't save income tax; they merely avoid NICs. But they deprive you of the ability to fund a PP.... so in the long run, assuming you are a lower rate taxpayer in retirement than before, you lose out there. Also divis can be paid only out of distributable profits.

Expenses, yes, but only if incurred wholly in the running of a business.

The partner case you probably refer to was a famous but quite specific married couple case where the wife was paid dividends. Had they been unmarried, or had she drawn a salary, it would not have applied.

As you suggest, the whole picture hangs on a list of indicators, and a smart contractor will keep as many of these in place as possible.

Finally, I wouldn't call the Revenue 'nice people'. They are aggressive cynical bastards, who know that anybody who is actually successful will always write a cheque to keep his life simple, so if one is into boats, horses or planes, they will hit you with an "enquiry" knowing full well that you will settle somewhere between the cost of hiring a tax barrister (£10-20k) and what they ask you for. A busy inspector can run a few dozen such "enquiries" concurrently, and he gets indirect commission on his recoveries. The punters who want their day in court, or who want that strange concept called justice, are usually the less successful ones, and the inspector will try to avoid those.

[Fuji Abound]

The badges of employment versus self employment are well established before the Courts. In the vast majority of instances it will not be difficult to determine status. It would be ridiculous to argue that all FIs should be employed or self employed.

There are many features of the work undertaken by a FI and his relationship with school(s) which would dispose to the possibility of either arrangement.

IO540

On a minor point of order you dont deprive yourself of being able to fund a pension as the current rules only take account of your employment history in the run up to obtaining pensionable age. That said, there would be some that would question the benefits of funding a pension these days!

You are otherwise correct in your comments.

[Gertrude the Wombat]

You should be OK, MJ, because in any scenario where HMRC determine that a "self employed" person was in reality an employee, it is the case that the alleged "employer" was deemed to be deducting PAYE.

Unless the contract is between the school and a one-man limited company owned by the contractor, in which case HMRC go after the one man under IR35.

[Gertrude the Wombat]

If an instructor works EXCLUSIVELY for one school / club on a 'self employed basis', then a 'master and servant' relationship will exist. In this situation, HMRC will try to argue that that the relationship is in fact 'disguised employment'.

On the other hand, if an instructor works on a self employed basis for a number of people, he / she is genuinely self employed and HMRC can then have absolutely no issue with the arrangement.

Wrong on several counts.

Having only one client does not produce a "master and servant relationship" or make you a "disguised employee" - employment status law is much more complicated than that, and people have won against HMRC in court despite having only a single client for several years. (You are however right that HMRC will try it on.)

Similarly, whilst having more than one client is a jolly good indicator that you are not a "disguised employee", and the odds could well be in your favour, this is not a magic bullet, and you could still be found to be a "disguised employee".

There is one very simple rule to remember about employment status: "there is no magic bullet", and hence no simple cases.

[Say again s l o w l y]

This could be a very big thing really.

Clarification is really required, there are schools out there taking the p*ss royally, but the arrangement sometimes suits FI's as it allows them to Foxtrot Oscar at short notice if something better pops up.

For people like me, this won't make a difference, but for full time FI's whose sole income is from one school it should be good.

Many clubs and schools need to get more organised anyway, this will force it to happen.

It may even help them keep a closer eye on the accounts. Many schools have gaping holes and there have been a lot of cases where people have taken the mick something chronic and have only been found out a long time after the fact.

In good schools this won't make a huge amount of difference, but with some of the hookier ones, this will make things better if it goes through.

[Mike Cross]

AFIK the general rule is that if the payer dictates when and how the job is done HMRC will view it as employment. If the worker decides it then it can be treated as self employment.

Example
You pay someone to paint your house. He provides the materials and does the job his way to his own timetable, self employment.
You obtain paint ladders etc and employ someone to do the painting at an hourly rate under your supervision at set times, employment.

I suspect that the pitiful wages of FI's mean HMRC have more rewarding targets to pursue.

WRT clubs owned by their members. They are generally companies limited by guarantee with each member typically guaranteeing one pound, which is the most they can be called on to pay. The clue is in the word "limited".

As for schools run as charities, I'd love to see one that's registered with the Charity Commissioners!

[IO540]

the arrangement sometimes suits FI's as it allows them to Foxtrot Oscar at short notice if something better pops up.

The thing is that an employee can FO at zero notice anyway and there is nothing whatsoever the employer can do about it. The employer still has to pay the employee for hours actually worked. Obviously the employee won't get a reference from that employer but he won't need one because he has already found himself a new job

The stuff about having to give notice works in only one direction: against the employer.

In the end, if the business is there, then various formulae will suit different people. If the business is not there, no amount of employee protection will do anything because the employer's business will go TU.

[belowradar]

Aviation is a funny business where many (not all) clubs exploit young keen and eager pilots desperate to log hours and jump to the airlines. This is a mutually exploitative relationship normally with a good turnover so nobody gets exploited for too long.

Club gets good income from trial lessons and instructor logs hours and eventually lucks out.

Unfortunately the rest of the world operates slightly differently in that most people want to earn a decent income and have some written terms of engagement with benefits (pension etc). Most organisations are happy with this concept and are able to pay said benefits.

I would like to see these existing tax rules enforced so that some shoestring clubs fail with the better more law abiding ones remaining. Good news for self employed instructors and employed (but only if you really are self employed as per normal tax interpretation).

[mad_jock]

The problem is certain individuals have started using the references as a weapon against any FI who goes against the status quo.

From personal experience until the 5 years is up it can become a horrendous battle to get any airport ID issued.

[bigfoot01]

IP540 You are probably right, and I probably don't understand these things :-)

I will observe, however, that transferrence of income from income at a higher rate tax to Dividends does provide a marginal advantage...