Draft Article for Tolleys Practical NIC Brief Teachers – Categorisation by Regulation One of the ongoing issues I regularly advise on for clients is whether the people who provide services to their business are employed or selfemployed. We all understand that the financial savings of using service providers rather than employees can be considerable and, therefore, there is a temptation to try and have all workers being selfemployed. Equally, H M Revenue & Customs would rather that all workers were employed! In addition, we all appreciate that there are tax differences for employees and self employed individuals (consider the “wholly and exclusively” rule for business expenses compared with the “wholly, exclusively and necessarily” rule for employee expenses) but of more immediate benefit are the National Insurance Contribution differences. The simple example below clearly illustrates the financial gain for users of service providers compared with employees. Employed v Self Employed (2007/08)
Employed Earnings Employee’s NIC (Upper limit) Less lower limit Class 1 (40,000 – 34,840) Employer’s NIC (No Upper limit) Less lower limit
£ 34,840 5,225 29,615
40,000 5,225 34,775
£ 40,000 x 11% x 1%
3,257.65 51 .60 3,309.25
x 12.8%
4,451 .20
Total NIC for an employee Self Employed Earnings Class 2 Class 4 (34,840 – 5,225) Class 4 (40,000 – 34,840)
£
£7,760 .45 52 x £2.20 x 8% x 1%
40,000
114.40 2,369.20 51 .60 £2,535 .20
With an increased liability of over £5,000, the financial incentive to, at least, look closely at the categorisation, or status, of individuals employed (in the widest sense of the word) in a business are worthwhile. From a tax perspective, there has been a lot of commentary concerning the legislation and Case Law that has evolved over many years, and it is not my intention to go over this again in detail in this article. However, to remind you, I would mention that the tax aspects take into account a variety of considerations, such as:
• • • • • • • • • •
right of control the right to get a substitute or helper to do the job provision of equipment financial risk opportunity to profit from sound management basis of payment sick pay, pension rights and paid holidays exclusive services right of dismissal intention of the parties
For many individuals, the same considerations apply for NIC purposes but there are a number of industries where, effectively, the NIC Regulations say that the status is determined by the Regulations as opposed to any other consideration. One such area relates to teachers, who are caught by the regulations at Schedule 1 (Part 1 paragraph 4) of the Social Security Contributions and Benefits Act 1992, s 2(2)(b). The basic premise is that teachers, including lecturers and instructors, who are employed under a contract of services (normal employment contract) are similarly treated as employees for NIC purposes. Although this might appear obvious, this also includes parttime teachers and trainee teachers. The fun starts if the individuals are NOT employed under a contract of services. This may include peripatetic teachers who attend a number of schools or other premises to undertake lessons for pupils or students of a teaching facility and who are not on the general staff of that facility. Apart from these, other exceptions might be private schools operated by a partnership of the teachers, or headteachers who are the proprietor of the school. For those individuals not employed under an employment contract, the NIC regulations seek to impose employment status for NIC purposes only. This can then produce the unusual circumstance where an individual correctly pays tax under the selfemployment rules but his deemed employer must deduct Class 1 NIC from earnings paid to him. I say unusual because, even though the regulations were introduced in 1978, ie, nearly 30 years ago, there are still teaching establishments, professional advisors, and even Revenue staff, who are not aware of the regulations. So we now have the basic idea of individuals who are NOT employed under an employment contract being DEEMED employees for NIC purposes. The regulations say (in my words): An individuals engaged as a teacher (including lecturer, instructor or similar capacity) in an educational establishment by anybody providing education is deemed to be an employee unless any one of the following conditions applies: 1. the individual is an agency worker (and therefore employed by the agency), or, 2. the education given is a public lecture, or,
3. the education given is limited to no more than 3 days in three consecutive months, or, 4. the education given is done remotely, unless the work is provided through the Open University, or, 5. the earnings are not paid by the person providing the education. The final point covers situations where, say, a peripatetic music teacher is providing lessons to pupils on a onetoone basis at a school but the contract and payment is directly between the teacher and the parents of the pupil. Assuming that we cannot avoid the rules because none of the five bullet points above apply, is there anything else to consider? Educational Establishment Apart from “What is education?” the main point to consider is “Educational Establishment”. We would all recognise a school or college as an educational establishment but how far does this term apply? Helpfully, the NIC Regulations give guidance on this and confirm that the term includes, “any place where instruction is provided in any course or part of a course designed to lead to a certificate, diploma, degree or professional qualification.” Unhelpfully, the Regulations go on to state, “or any like place where courses are substantially similar but do not lead to a certificate, etc.” The consequence of this is that almost anywhere could be an educational establishment including, possibly, a village hall where regular adult learning classes take place. A recent prominent case (St John’s College School, Cambridge v Secretary of State for Social Security) allowed the Revenue to expound its view that an educational establishment does not have to be a building but will be a “place” where the education occurs. The Revenue commentary includes a statement to the effect that if the education is leading to a certificate, etc, and part of the education takes place in the open air, then the open air is an educational establishment! Another point here is that the course provided does not need to be one provided by the educational establishment itself; the fact that the course takes place somewhere that is recognised as an educational establishment is sufficient for the Regulations to bite. To summarise In summary, care needs to be taken with individuals who educate others and are generally accepted to be selfemployed for tax purposes. It is entirely possible that, despite this, those same individuals are employees for NIC purposes. Although this is irritating for the individual, it can be more of an issue for the deemed employer who should have deducted Employee’s NIC from any payment AND incur a liability to Employer’s NIC. Additional problems arise for the deemed employer if it is discovered that payments have been made in earlier tax years as the employer will be required to pay any additional NIC due but may find it difficult to obtain any recompense from the individual concerned.
If you have any selfemployed teacher clients, it has to make sense to, at least, mention the possibility of a problem. Finally, teaching is not the only industry affected by “Employment by Regulation”. Other businesses potentially at risk include office cleaning, telephone cleaning, ministers of religion, and individuals in the entertainment industry. Ken Voller FFTA ATT Tax Business Southampton 023 8090 6534 ken@taxbusiness.co.uk