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bigduckontax
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 3374
Experience:  FCCA FCMA CGMA ACIS
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MHRC are wanting to get my husband to not get entrepreneurs

Customer Question

MHRC are wanting to get my husband to not get entrepreneurs tax relief. He works at Cambridge university and set up the company to sell the product that he invented the patents for. He has worked regularly for the company (worked for them for 3 years) during which time he applied for the entrenreneurs tax relief. The company was a start up and didnt really know what they were doing and did not put him on PAYE, in spite of him requesting it. HMRC is now saying that because he is not on PAYE he is not considered to be an employee and therefore is not due the tax relief. They are using the company not putting him on payee and the fact that his contract calls him a consultant as evidence that he was not an employee. (bit of a circular argument). However, the HMRC employee status indicator tool says that he should be considered an employee. He has never invoiced them, was paid monthly, except when they were so disorganised they paid late, he went to their christmas do and company meetings, and represented the company at meetings, trade shows, conferences, etc. He had a company business card and email address, and a desk there. Oh, and he had bad leaver clauses where he was not allowed to leave the company for a year after they got new investment and also had a clause in his contract that stated that he was not allowed to work for a competitor company for 12 months after leaving them. His title was Chief Scientist and there were not specific projects he had to work on and no end to the contract (ie it did not say when you finish this task or after a certain period of time the contract is over). I thought that regardless of what a contract says a person is considered an employee if they work for a company for longer than a year?
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
i am of the opinion that he was held out by the company to be an employee. If he were a director of the company he is an employee per se. Entrepreneurs' Relief (ER) is only applicable to the Capital Gains Tax (CGT) regime limiting any tax due on a gain from disposal of his interest in the company to 10% as opposed to the normal 18% or 28%. If he has not disposed of his interest in the company ER does not arise.
No doubt you will need to submit some follow up information from my answer. Please fell free so to do.
Customer: replied 2 years ago.

Hi,

What do you mean by 'held out by the company to be an employee'? Does that mean you think he was an employee? He was not a director but had almost the same contract as the director except for needing to attend board meetings (so not an employee or a contractors contract).Yes, he did dispose of some shares, which is why this issue has arisen. But how do you argue with the HMRC who is claiming that because the contract called him a contractor not an employee and because they refused to put him on payee therefore he is not an employee?... what do we say to them? We have pointed out the results of the MHRC employment status indicator tool.

Is it legal to have someone work regularly for a company for a number of years and for them not to be an employee?

I think quite a few directors and managers may not be employees.

Expert:  bigduckontax replied 2 years ago.

The difference between an employee and a contractor is that an employee can be told what to do and how to do it whilst a contractor can be told what to do, but but how to do it. That is the acid test and should be put before HMRC.

ER is only available to the following persons:

'an officer or employee of that company (or an officer or employee of one or more members of the trading group).' [HMRC Help Sheet 275].

This is clearly where HMRC are heading. As a contractor, so described in your husband's arrangements with the company he would not be so entitled.. He would be self employeed and have a far greater range of expenses which he coulld set off against his income that would an employee. The line to take against HMRC is that he was on exactly the same arrangements for payment as the directors save for attending board meetings. As I told you directors are employees per se and there is no way around that. His position is further reinforced by the fact that he never invoiced the company for work undertaken and that also by HMRC's own rules, the employment status indicator. I fear that due to the ineptitude, inexperience and incompetent management of the company's administrative arrangements that you are in for a battle with HMRC with endless correspondence. Naturally they want to recover CGT at 18% or 28% rather than 10%. Any assessment to CGT shoule be the subject of an immediate appeal and you may find it adviseable, if substantial gains are involved, to employ a local, trusted professional to act on your husband's behalf.

As a matter of interest what Class or Classes of National Insurance did your husband pay on his income from the company?

bigduckontax, Accountant
Category: Tax
Satisfied Customers: 3374
Experience: FCCA FCMA CGMA ACIS
bigduckontax and 2 other Tax Specialists are ready to help you
Expert:  bigduckontax replied 2 years ago.
Tiny amendment; paragraph one line one after 'but' insert 'not.'
Expert:  bigduckontax replied 2 years ago.
Thank you for your support.
By the by, that query about National Insurance classes was relevant.
Customer: replied 2 years ago.

I am not sure. Will need to ask him when he gets home.

Expert:  bigduckontax replied 2 years ago.
Thank you.
Customer: replied 2 years ago.

hi,

No, he has not paid NI on it because he had been asking the company to go on PAYE. He did declare the earnings though on his tax returns.

He also has not been paying any extra NI as a self-employed person.

In fact, he showed them the results of the HMRC employee status tool, which indicated that he should be an employee, and they did nothing. He made a proposal in writing to go onto PAYE, and at the meeting he was due to be discussing PAYE, they dismissed him on false grounds and incorrectly (i.e. they were meant to give him notice etc). He thinks that they dont want to have many people employed because that will make the company more attractive for further investment. He suspects that several of the managers are on contracts instead of being employed.

Expert:  bigduckontax replied 2 years ago.
The use of managers on contract is widespread [seen the scandal a few years ago over BBC senior executives], but despite pressure no change to tax law has yet been forthcoming.
If he is an employee he should be paying NI Class 1, if self employed at Classes 2 and 4. If HMRC on their tax computation are quoting Class 1 NI then they class him as employed. If they are trying to charge 2 and 3 then self employed. This may help you in your negotiations with both HMRC and the late emplyer.
With respect, your husband should never have allowed this sort of treatment to drift along so long; just think of the consequences had there been an industrial accident.
Customer: replied 2 years ago.
We thought it was not legal for a person to work for a company for years and not be an employee!
There was a rush to get contracts signed for investment, so there was no time to sort out the details, and then they had further investment fairly soon and he was told that it was part if the investment deal that the contracts couldn't be changed, so they wouldn't do it then. They have had 4 managing directors in 3 years, so he has gone to each one, but by the time they are settled, things change.., and this has not been a priority for them. The last managing director dismissed him when he pushed the issue if being on paye. Hmrc don't seem to be bothered by anything the company should have been doing.
We think we stand more of a chance at an independent tribunal than using the hmrc appeals process?
Expert:  bigduckontax replied 2 years ago.
It is not illegal, unless of course they are company directors, merely frowned upon.
That is what you have a company secretary [I am a Chartered Secretary, preen, preen] for, to ensure compliance whilst executives are thrashing about! Unfortunately limited companies are. since the Companies Act, 2006, are no longer compelled to appoint same.
I would suggest that he may well have a case for wrongful dismissal. Costs are not awarded for Industrial Tribunals so only his costs are involved. You should consult a local, trusted solicitor for advice or, of course, his Trade Union if he has one. have a look at your house insurance and indeed other insurance policies; you may well find it as an add on there.
Customer: replied 2 years ago.
Yes, wish they had had one!!! Point made! :-)
Yes, he is pursuing wrongful dismissal. Just a thought... Can he pursue them for the paye thing? If they had put him in paye like he asked he would not be in this situation.
Oh didn't realise one had to pay for hmrc tribunal :-/ I thought it was their way of mediating disputes.., is it worth going to the mo and the papers... Cambridge university entrepreneur who invented patents and started a company to see the product and who worked for the company for three years is not entitled to entrepreneurs tax relief!
Expert:  bigduckontax replied 2 years ago.
It is indeed, but if you are represented the representation cannot be recovered in an Industrial Tribunal hearing win or loose. In exceptional circumstances eg spurious claims the claimer can be ordered to pay the other sides costs.
Whether the PAYE affair can be incorporated in his claim I would refer to his legal representative.
Unfortunately, as he worked through a company, he would not be entitled to Entrepreneur's Relief (ER). However, if it all comes out in the wash that he was self employed and was in at the ground floor so to speak, a claim for ER might be entertained and HMRC would have to back off.
Customer: replied 2 years ago.

I may have written that incorrectly. The company that he claims should have been employing him with PAYE were the company that had the shares that he should be getting EN from. He was not working though a company. He was in on the ground floor.

How can it help if he was self-employed (which he wasn't and didnt pay tax in that way)? ... dont you have to be employee or an officer?

Expert:  bigduckontax replied 2 years ago.

Well, he has to be in at the ground floor to claim ER. If he is deemed as self employed there is a problem. If, however, his is employed then the relief will be available. I did explain this principle in my original answer.

Expert:  TonyTax replied 2 years ago.

Hi.

You do not have to be "in at the ground floor to claim ER". If that were the case, many people who buy existing businesses would not be able to claim ER.

If I bought the shares in an existing limited company from the founder and satisfied the conditions set out in HS275, I could claim ER when I sold my shares. If that were not the case, the person who started a business from scratch would have trouble selling it because according to another view, the buyer would not have been "in at the ground floor". In addition, if I took on a business partner and gave them shares, they could also qualify for ER subject to meeting the conditions set out in HS275.

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