Topics
Should I be registered for VAT?
Are you really self employed?
Employment status is an important issue for both the 'employer' and sub-contractor as getting it wrong will be costly as HM Revenue and Customs (HMRC) will penalise you heavily. Just because HMRC have treated you as self employed does not mean that in reality you are however unfair that may seem. If you are the 'employer'/contractor it is not a matter of telling someone they are self employed there are factors to consider. So how do you tell? There are no absolutes just indicators as to whether you are self employed or not. Here are some of them;
Mutual Obligation
To what extent are you obliged to accept work from the contractor? To what extent is the contractor obliged to provide work for you? The more obligation there is on either side then the indicator is towards employment.
Integration
To what extent are you involved in the business of the contractor? Do you have access to offices, are you able to use the equipment of the contractor e.g. tools, office equipment. Do you have a desk and computer provided for you? Are you invited to the Christmas Party? If your answer is yes to the majority of those questions then the indicator is towards employment.
Control
To what extent is your work controlled by the contractor i.e. how and when you do it? In todays increasingly skilled work force this test is less clear, as it is unlikely that someone would tell a surgeon how to do his job whether self employed or not. Remember that all these tests are considered by the courts together, so it is not just one test they look at.
Equipment
Who supplies large plant and machinery for the work the sub-contractor does? If it is the contractor then this is an indicator towards employment.
Financial risk
Do you have any financial risks? Are you paid by the hour or day and if something goes wrong do you still get paid (Employment indicators)? Or would you have to put the work right if you made the mistake? Are you able to quote a price for a job and gain more profit if it is finished in a shorter time or will you lose out if it takes longer than expected? The courts have stated that simply raising an invoice entails a degree of financial risk. Do you hold liability insurance and consider yourself to be in business in your own right.
Substitution
Does any contract either written or verbal permit you to substitute another individual in your place if YOU wish? If you are able to do so then this is a strong self employment indicator. The courts will however look at the working practices and see if a substitution actually took place or not.
Working periods
Working for the same contractor for a long time MAY indicate employment but then again if that is where the work is you would obviously provide services to whoever wants those services. Supplying materials and providing a price for each job are good indicators of self employment. Having several paymasters i.e. several people for whom you work is better however, but not conclusive as each of those could be separate employments.
Summary
If there is a dispute with the Inland Revenue (HMRC) that eventually goes to court then the above factors will be considered in reaching a decision.
Should you be registered for VAT?
If the historical turnover of a business over a maximum of the last 12 months exceeds 61K (2006/07) then the business is forced to register for VAT assuming that the goods or services it supplies are taxable supplies. If the business works mainly for private individuals (or supplies goods) this will add 17.5% to the price cost and become more expensive. Or the business reduces its prices but makes a lower profit.
Two Tests for registration
Historical test - Example A business starts to trade say on the 1/1/05. In the first 6 months it turns over 50K . Should it register for VAT?
Answer NO. Not yet. After 9 months it turns over £61,500. Should it register? YES!
Or a business has traded for many years. It must look back every 12 months and see if the turnover has exceeded the £61K (2006/07). If so it must register.
A business has 30 days in which to register. So, in effect it will be registered on 1st of the following month and get 1 month 'free' before registration.
Question
A business turns over 63K as at the 31st October 2005. When must it be register from? Answer - 1/12/05.
Future Test If Mr. Trader turns up one morning and has an order worth £70K and he’ll turnover the job around within 30 days i.e. he will exceed the threshold within the next 30 days, then he must register immediately from that day! Watch this point!