The People Bulletin

The Categorisation of Earners Regulations 1978 determine certain groups of self employed individuals to be employed earners for NIC purposes. What this means is that although such workers may be self employed for tax purposes, payments to them, if caught by the regulations, are subject to Class 1 employer’s and employee’s NIC.

I can point you to various places in the standard HMRC issue PAYE notes where clear explanations of the rules are given; for example, you need go no further than page 6 of the Employer Further Guide to PAYE and NICs CWG2 (2009)¹. It is not buried in the small print, and yet, in practice, it appears that this legislation is often overlooked. Perhaps this is because of the divide between payroll and purchase ledger in many organisations. Payroll may not even see such transactions and purchase ledger are unaware of the requirements.

Where NIC is applied under these regulations it is typically unpopular when enforced and often meets with resistance. Remarks such as ‘no body else has told me this is required’ and ‘the other company/organisation I work for has never deducted NIC’ are common and can unnerve whoever is trying to implement it. Even HMRC, it has to be said, has on occasion, given inaccurate advice on the point adding to the uncertainties, to our knowledge once even refunding NIC that an employer had correctly deducted… bizarre. But, now that you know, stand firm, for if you are the secondary contributor and fail to apply this you as ‘employer’ will be liable for Class 1 primary and secondary NIC plus interest and penalties. As we all know ignorance of HMRC rules is not sufficient to mitigate penalties (although inaccurate advice from HMRC may help).

First step

I am just going to remind you that, before anything else, the first step is a consideration of the individual’s actual employment status. The NIC regulations I am discussing here apply to self-employed service providers. If the individual is actually employed then, back to square one, the correct procedure is to tax and NIC them through payroll.

Who is affected?

The following notes are an overview of the main conditions. Careful consideration of each case is advisable. The less common groups have not been discussed here (ministers of religion and people employed by their husband or spouse/civil partner for the purposes of his/her employment.)

Cleaners

Cleaners are employed earners under the regulations when employed as a cleaner of:

• an office or premises other than a private dwelling house; or
• any telephone apparatus and associated fixtures other than apparatus and fixtures in premises used as a private dwelling house.
• under the regulations, the secondary contributor is treated as
• the agency or third party which supplies and pays the cleaners; or
• the person with whom the cleaner contracts to do the work.

If your organisation has multiple offices you may find examples of payments to cleaners in purchase ledger or from petty cash. It’s worth digging a little.

Certain actors, musicians or other performers

The regulations reflect the fact that those entertainers whose remuneration includes any element of salary will be defined as employed earners for NIC purposes, even if they meet self employed test for income tax. Entertainers include actors, singers, musicians or anyone in a similar performing capacity.

In this context, it will be considered salary where the following four tests on the payments are all satisfied.

1. made for services rendered;
2. paid under a contract for services (whether or not this is in writing is irrelevant);
3. where there is more than one payment, payable at a specified period or interval; and
4. computed by reference to the amount of time for which work has been performed.

Most part time or visiting lecturers, teachers or instructors

Anyone who is engaged as a lecturer, teacher, instructor or in any similar capacity in an educational establishment by any person providing education is to be treated as falling within the category of employed earner (i.e. subject to these NIC rules) provided:

1. They are not agency workers.
2. The instruction is not given as public lectures.
3. The number of days on which the instruction is given is not limited , by prior agreement, to three days or less in three consecutive months.
4. The instruction is given in the presence of the person to whom the instruction is given (i.e. the children are face to face with the teacher).
5. Their earnings are paid by, or on behalf of, the person providing the education.

An educational establishment is defined in the regulations as including:

• a place where instruction is given leading to a certificate, diploma, degree or professional qualification; or
• a place where instruction is given which substantially follows the same type of syllabus but which is not designed to lead to such a certificate, diploma, degree or professional qualification.

In practice, the above definition is wide and catches many situations. It is advisable to seek advice if there is any doubt. The rules are also often difficult to apply and HMRC has recently launched a consultation on the subject². For example, the first aid training sector has experienced particular problems in applying the regulations.

Most agency workers

A worker who:

1. obtains employment by or through some third party; and
2. renders or is under an obligation to render personal service and
3. is subject to (or to the right of) supervision, direction and control as to the manner of rendering such service and
4. there is a continuing financial relationship between him and the third party

…is to be treated as an employed earner for NIC. It is the agency who is the secondary contributor.

What to do

Once you are sure that the individual is caught by the regulations you need to pay them through payroll following the usual payroll procedures but using an NT tax code. It may be that in reality if the amount of the pay is less than the Lower Earnings Limit (LEL) no P11 record is needed. But if the pay, excluding expenses, exceeds the LEL a P11 is required and of course anything over the Earnings Threshold will result in a NIC payment.

Expenses payments may be disregarded and paid without NIC deduction.

The Categorisation of Earners Regulations 1978 determine certain groups of self employed individuals to be employed earners for NIC purposes. What this means is that although such workers may be self employed for tax purposes, payments to them, if caught by the regulations, are subject to Class 1 employer’s and employee’s NIC.

I can point you to various places in the standard HMRC issue PAYE notes where clear explanations of the rules are given; for example, you need go no further than page 6 of the Employer Further Guide to PAYE and NICs CWG2 (2009)¹. It is not buried in the small print, and yet, in practice, it appears that this legislation is often overlooked. Perhaps this is because of the divide between payroll and purchase ledger in many organisations. Payroll may not even see such transactions and purchase ledger are unaware of the requirements.

Where NIC is applied under these regulations it is typically unpopular when enforced and often meets with resistance. Remarks such as ‘no body else has told me this is required’ and ‘the other company/organisation I work for has never deducted NIC’ are common and can unnerve whoever is trying to implement it. Even HMRC, it has to be said, has on occasion, given inaccurate advice on the point adding to the uncertainties, to our knowledge once even refunding NIC that an employer had correctly deducted… bizarre. But, now that you know, stand firm, for if you are the secondary contributor and fail to apply this you as ‘employer’ will be liable for Class 1 primary and secondary NIC plus interest and penalties. As we all know ignorance of HMRC rules is not sufficient to mitigate penalties (although inaccurate advice from HMRC may help).

First step

I am just going to remind you that, before anything else, the first step is a consideration of the individual’s actual employment status. The NIC regulations I am discussing here apply to self-employed service providers. If the individual is actually employed then, back to square one, the correct procedure is to tax and NIC them through payroll.

Who is affected?

The following notes are an overview of the main conditions. Careful consideration of each case is advisable. The less common groups have not been discussed here (ministers of religion and people employed by their husband or spouse/civil partner for the purposes of his/her employment.)

Cleaners

Cleaners are employed earners under the regulations when employed as a cleaner of:

• an office or premises other than a private dwelling house; or
• any telephone apparatus and associated fixtures other than apparatus and fixtures in premises used as a private dwelling house.
• under the regulations, the secondary contributor is treated as
• the agency or third party which supplies and pays the cleaners; or
• the person with whom the cleaner contracts to do the work.

If your organisation has multiple offices you may find examples of payments to cleaners in purchase ledger or from petty cash. It’s worth digging a little.

Certain actors, musicians or other performers

The regulations reflect the fact that those entertainers whose remuneration includes any element of salary will be defined as employed earners for NIC purposes, even if they meet self employed test for income tax. Entertainers include actors, singers, musicians or anyone in a similar performing capacity.

In this context, it will be considered salary where the following four tests on the payments are all satisfied.

1. made for services rendered;
2. paid under a contract for services (whether or not this is in writing is irrelevant);
3. where there is more than one payment, payable at a specified period or interval; and
4. computed by reference to the amount of time for which work has been performed.

Most part time or visiting lecturers, teachers or instructors

Anyone who is engaged as a lecturer, teacher, instructor or in any similar capacity in an educational establishment by any person providing education is to be treated as falling within the category of employed earner (i.e. subject to these NIC rules) provided:

1. They are not agency workers.
2. The instruction is not given as public lectures.
3. The number of days on which the instruction is given is not limited , by prior agreement, to three days or less in three consecutive months.
4. The instruction is given in the presence of the person to whom the instruction is given (i.e. the children are face to face with the teacher).
5. Their earnings are paid by, or on behalf of, the person providing the education.

An educational establishment is defined in the regulations as including:

• a place where instruction is given leading to a certificate, diploma, degree or professional qualification; or
• a place where instruction is given which substantially follows the same type of syllabus but which is not designed to lead to such a certificate, diploma, degree or professional qualification.

In practice, the above definition is wide and catches many situations. It is advisable to seek advice if there is any doubt. The rules are also often difficult to apply and HMRC has recently launched a consultation on the subject². For example, the first aid training sector has experienced particular problems in applying the regulations.

Most agency workers

A worker who:

1. obtains employment by or through some third party; and
2. renders or is under an obligation to render personal service and
3. is subject to (or to the right of) supervision, direction and control as to the manner of rendering such service and
4. there is a continuing financial relationship between him and the third party

…is to be treated as an employed earner for NIC. It is the agency who is the secondary contributor.

What to do

Once you are sure that the individual is caught by the regulations you need to pay them through payroll following the usual payroll procedures but using an NT tax code. It may be that in reality if the amount of the pay is less than the Lower Earnings Limit (LEL) no P11 record is needed. But if the pay, excluding expenses, exceeds the LEL a P11 is required and of course anything over the Earnings Threshold will result in a NIC payment.

Expenses payments may be disregarded and paid without NIC deduction.

[1] www.hmrc.gov.uk/guidance/cwg2.pdf

[2] This opened on 9 October and closes on 8 January 2010. Details and a copy of the consultation are available here