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If a business is going to use the services of an individual to provide it with time and effort, the general rule to follow is that they will be considered in the UK to be an employee unless there is a reason for them not to be treated as such. This general approach is termed the 'badges of employment' and will be a question of the amount of time spent by the employee, their obligations, their rights and their responsibilities to get the job done.
There is no definitive measure of employment vs. Contractor status, but the balance is normally tipped to indicate employment. In all cases of employment it is the employer's responsibility to deduct the necessary taxes and it is an expectation on the employee's part that these will be correctly calculated. The vast majority of people in the UK will never file a tax return – it is therefore down to the employer to get it right.
Where any staff are employed by a business registered in the UK (including any registration of a foreign entity with Companies House) a Pay As You Earn (PAYE) scheme will need to be set up in the business name for the collection of both tax and Social Security (National Insurance). This is a scheme set up with H M Revenue and Customs (HMRC) for administering the payroll taxes due on payments made to UK employees.
Where the employer has no place of business in the UK (e.g. the employee works from home and travels) then it is the employers responsibility to ensure that taxes are paid, but the employee effectively operates their own payroll. It is common practice for the employer to bear the cost of this.
Processing the application for a scheme takes approximately 15 working days.
Once the payroll registration is set up the payroll needs to be operated on the same basis as the payment cycle for employees (weekly, fortnightly, monthly) with monthly being by far the most common. Taxes are calculated through this process and the amount due to employees and HMRC reported.
A payroll period runs to 5th of each month, so any payments made within each payroll period are subject to statutory deductions for the period, and the taxes are due with HMRC two weeks after the end of the period.
Generally, on a monthly payroll, that means that the taxes are due on 19th of the month following 'payday'.
Employees must be provided with evidence of their earnings and statutory deductions. Physical payslips are no longer required, but an email payslip in a standard format would be expected as a minimum.
Annual returns for the payroll taxes have to be prepared and submitted to HMRC and passed to your employees. These are based on the payroll records from the year and no further collation of information should be necessary.
Any payments made to employees or on behalf of employees, who are not reported through the payroll, must be declared annually on a Form P11d.
Dispensations can be applied for in advance to disregard information on some of the common items that you may be paying to employees (refunding expenses etc.) which saves some administrative burden. This is granted only where HMRC is satisfied that sufficient controls are in place.
Any Benefits-in-Kind provided to staff are reported in this way and may be subject to both tax and social security contributions. HMRC will take the information submitted by the employer to calculate any taxes due and will instruct the payroll scheme to deduct tax accordingly by adjusting an employee's Tax Code.
There are other Oury Clark Quick Guides in this series that provide more detail on the responsibilities and obligations of an employer, but some key points to note are:-
This is only intended as a Quick Guide, so do seek help with any of these items to avoid penalties and legal issues.
This guide does not contain a full statement of the law and it does not constitute legal advice. Please seek legal advice if you have any questions about the information set out above.