Employment taxation
The taxation of employees raises a wide range of issues. Income tax for employees is generally deducted by the employer at source under the PAYE (Pay as You Earn) system. National Insurance (social security) contributions ("NICs") are collected in the same way but the rules are separate and are not always the same.
The following are some of the problems that can arise.
Is an individual employed or self-employed?
There is much case law as to the nature of employment. The criteria are basically the same for both employment and tax law. The tax rules for employees and for the self-employment are, however, very different from one another. The self-employment rules are often more favourable from the individual's point of view.
Personal service companies ("IR35") and managed service companies
Special rules may apply where an individual provides his/her services through an intermediary (such as his/her own personal company). The effect of the rules is to charge tax and NICs on sums paid to the individual or his/her associates on a similar basis as for an employee. The essential test is whether, if the individual had a direct relationship with the ultimate client, he/she would be treated as an employee.
These issues frequently affect IT contractors.
There are also rules on managed service companies, which employ individuals and provide their services to clients.
Cross-border tax issues
In the 21st century people frequently move between countries to work. This gives rise to questions such as:
- Where is an employee resident for tax purposes?
- Which territory or territories claim(s) the right to tax the employee under its/their domestic tax law?
- If more than one territory claims taxing rights, how is this resolved under an applicable double tax treaty?
- How is tax collected - if, for example, an employer does not have a taxable base in the territory where the employee is working?
Employers often also set up tax equalisation schemes. Under such a scheme an employee is guaranteed to pay the same amount by way of tax and social security contributions as if he/she were working in his/her home territory. This raises technical and practical issues.
Employee shares and share options
There are detailed rules covering a wide range of situations where an employee acquires shares, or an interest in shares, in the employing company (or a parent company). (The rules, which were introduced in 2003, were described in the Supreme Court in 2010 as "complex and obscure".) There are also rules that apply where an employee is granted an option to acquire shares in such a company at a future date.
There are several types of approved share option scheme, where the tax treatment is more generous than for unapproved options. In particular, enterprise management incentive ("EMI") share options are often useful in practice.
Employment income provided through third parties
New rules on this topic came into effect in 2011. Although apparently aimed at employee benefit trusts, they have much wider scope and often need to be considered. The rules are sometimes known as the "disguised remuneration" regime.
Examples of how we can help
- Advise on where an employer or employee stands under the law and HM Revenue & Customs' ("HMRC") practice;
- Advise on the best steps to take;
- Liaise with HMRC and others as required;
- Draft documentation as required.
Please contact us to find out more about our services and discuss your situation in more detail.