Employee Tax Payment - Assignment Example

? TAXATION Sam Smith Computation of taxable trading income for 12 2. Computation of Income tax and National Insurance for tax year 12 Calculations of National Insurance contributions of Sam Smith for the year 2011-12 3. Computation of taxable income, income tax and NIC of Mr Sam Smith on being treated as employee for tax year 2011/12 Computation of Income tax for tax year 2011/12 4. Implications of change in status “An employee will pay taxes on earnings from his employment. A self employed will pay taxes on the profits of his trade.” (Christopher Jones)i As per HMRC “A worker’s employment status, that is whether they are employed or self employed, is not a matter of choice. Whether someone is employed or self employed depends upon the terms and conditions of relevant engagement. The tax and National Insurance contributions (NICs) rules do, however have special rules that apply to certain special categories of workers in certain circumstances. If you work for someone else it is important to know whether you are working for that person in employed capacity or in a self- employed capacity as an independent contractor.” (HMRC)ii Self employed taxpayers have the advantage of claiming wide range of expenses against the receipts of self employment services. “The decision to become self employed can also be affected by tax system.”(David G Blanch flower and Chris Shad forth)iii There is also an advantage of payment of income tax by instalments as against taxes being withheld by the employer under the PAYE scheme. It becomes extremely difficult in many cases to distinguish between self employment status and employee status of a tax payer. Whenever any taxpayer is working on part time basis with more than one entity it is always the desire of HMRC to consider the tax payer under the employee status. This is because of easy and quick collection of taxes and NI under PAYE scheme on an income where only limited range of expenses can be claimed and thus providing higher amount of taxes. In fact these are the nature of activities of the taxpayer that decide the status of the tax payer. If there exists a contract of services then it is easy to consider taxpayer as an employee of the entity with whom the contract has been executed to render the services. But when such contracts exist for more than one entity the taxpayer would be treated as self employed rendering services to a number of entities. What will happen when there is no such contract? Under such conditions the issue is decided on basis of certain criteria. The main criteria are control over the performance of activities, fixidity of payment of remuneration even when the entity is not earning, ownership of equipments used by the taxpayer during the performance of the duties, and exclusivity of providing services to one entity among other considerations. In our case Sam is now providing services exclusively to West London Company, and that is why HMRC wants tax him under the status of an employee and not under the status of as a self employed person. When you are not your own master and control of your activities and the performance is guided by the person providing you the remuneration, the status of the taxpayer is treated as an employee of the person providing him/ her the remuneration. “You are responsible for your own taxes and NI contributions” (Directgov)iv In the case of Sam his activities are now completely controlled by West London Company. Company is providing a fixed monthly remuneration of ?7500 even though he is operating from home. At the same time company is also providing him access to a desk, telephone, computer, and also stationery in the office. No reimbursement of expenses is allowed under the arrangement as the remuneration is fixed at ?7500 per month. There is exclusivity as Sam is also not providing services to any other entity or client. It should be noted that employment income is taxed on the basis of receipt of remuneration and not on accrual or earned basis which is applied when the taxpayer’s status is that of self employed.”An employer with the presence in UK is obliged to deduct income tax and employees’ NICs under what is call Pay As You Earn(PAYE) system.”(Andrius R. Kontrimas)v Also employment income include almost all the amounts received from the employer whether called remuneration or not. For example any incentive or bonus will also be treated as employment income. Moreover, it is not important who is paying the remuneration to the taxpayer. If taxpayer is being paid remuneration by a third party for and on behalf of the employer, the receipt of that will be treated as employment income for income tax NI contribution purposes. On being treated as an employee of West London Company by HMRC, the following implications are worth considerations: Sam will not be required to calculate his profits or income in the usual way of deducting his expenses incurred wholly and exclusively incurred for the purpose of his profession as self employed consultant. Instead the following expenditure will only be allowed from his remuneration as employee of West London Company: 1. Contribution in an occupation pension scheme, if any, by Sam. Incidentally Sam is not contributing anything under such scheme. 2. Subscription to professional bodies of which Sam is a member. That is why a deduction of ?500 has been made while calculating Sam’s employment income hereinabove. 3. Donations that are made under any payroll scheme. Sam has not made any such donations. 4. Travelling expenses that are incurred for the purpose of performing his duties as an employee, if those have not been reimbursed by the employer. That branch visit and stay expenses have been deducted while computing employment income of Sam herein above. Here the criterion is that expenses should be exclusively and wholly for the purpose of performing his duties. It must be noted that travel expenses between home and work is not allowed. Here the assumption is that duties of employment do not start till the employee reaches his office. Even though Sam have used his car for 1600 miles for reaching from home to office, but no expenditure is deducted in that respect while computing his employment income. 5. Any other expense that is wholly and exclusively incurred for performance of duties is allowed as deduction from employment income. That is the repair and software expenses of computer have been considered above in the computation of employment income of Sam. The range of claimable expenses is much lower as an employee than if Sam would have treated as self employed tax payer. This would raise the taxable income and the liability of taxes payable by Sam during 2011/12. Under the status of employee Sam will be required to pay primary class 1 National insurance. Sam is also not a contracted out employee. Therefore the NI contribution of Sam is computed as under, as he is getting monthly remuneration from West London Company: Monthly contribution Up to remuneration of ?476 0 On $3180 (?3656-476) @11% 350 (rounded) On balance ?3844 (7500-3656) @1% 384 (rounded) Total monthly primary NI contribution 734 As self employed taxpayer Sam was supposed to contribute Class 2 and Class 4 National insurance. Class 2 NI is a weekly contribution @?2.40 per week and class 4 NI contributions is based on taxpayer’s trading income. If the trading income does not exceed lower profit limit of ?5715, the tax payer does not have a class 4 NI contribution liability. When trading income is above this lower profit limit, the self employed tax payer has to make class 4 NI contributions @ 8% on income between lower profit limit of ?5715 and upper profit limit of ?43875. On trading income exceeding the upper profit limit, the self employed taxpayer has to contribute class 4 NI at the rate of 1% on the excess over upper profit limits. The major effect of such change would be that West London Company would be required to make payee and NI contribution deduction from the monthly remuneration of ?7500 and deposit that in accordance with rules and regulations. Consideration will also be made about whether Sam is P11 D employee. P11D employees are those whose annual remuneration is more than ?8500. Accordingly Sam will be considered a P11D employee as his annual remuneration would be ?90000. However, as Sam is not getting any benefit other than his monthly remuneration, he would not be considered for special rules for benefit computation. In nutshell on being treated as an employee of the West London Company, Sam Smith will have to pay a higher amount of income tax for the tax year 2011/12 as against him being treated as self employed. The calculation above shows that income taxes as an employee for tax year 2011/12 comes to ?23687 against the income tax liability of ?21983 when he is treated a self employment. The reason for this difference is that as an employee Sam has limited range of expenses to be considered as wholly and exclusively for the purpose of performing his duties. Also the contribution of Sam towards national insurance as an employee is much higher for tax year 2011/12 against the contribution towards NI as self employed tax payer. Therefore the impact on the liability of income taxes and NI contribution is higher as an employee than being treated as a self employed taxpayer. Word Count: 1587 References Read More