Essential Finance – Taxing times

The recent scare amongst orchestra managers over unpaid National Insurance contributions highlighted the possible pitfalls of engaging freelance staff. Lesley Fidler looks into the issues involved in engaging performers.
Recent issues of ArtsProfessional have mentioned the demands by HM Revenue & Customs (HMRC) for arrears of National Insurance contributions (NICs) from orchestras. The demands took administrators unawares and illustrate how complex and expensive this area can be for those who engage the services of performers of all kinds: actors, dancers, musicians and all other performers and artists. Before looking at some of the steps administrators may take to ensure that they have acted in the interests of their organisations, an overview of the relevant NICs and income tax rules may help set the scene.

Personal commitment

A fundamental distinction is made between workers who are employees and those who are self-employed. Very broadly, employees are those who are an integral part of a bigger business and who work under a contract of service, whereas self-employed are in business on their own account and supply their services under a contract for services.
Unfortunately, the complexities of modern working patterns have blurred the distinctions and it can sometimes be very difficult to determine whether an individual is employed or self-employed. Indeed, some European legislation such as the Working Time Directive, recognises an intermediate category of worker that encompasses not only true employees but also those genuinely self-employed people who are committed to providing their services personally.

Standard British Actors Equity Association contracts contain provisions that protect the individual and which in other trades or professions would be regarded as indicating employment. However, following a number of legal challenges, HMRC was forced to accept that self-employment nevertheless exists: The typical performer/artist is likely to have a whole series of separate engagements& Commonly, these engagements are interspersed with periods without paid work& independence from a particular regular paymaster may indicate that individual contracts are not contracts of employment. (HMRC Employment Status Manual, para ESM4121).

It goes on to contrast a varied career with longer-term, certain work: The sort of engagement [that is treated as employment] is more likely to be in circumstances where a performer/artist is engaged for a regular salary to perform in a series of different productions over a period of time& This would apply for example to permanent members of some orchestras and permanent members of an opera, ballet or theatre company.

Proper payments

The distinction between employment and self-employment is important for both the individual and the employer because different tax and National Insurance consequences apply to the two situations. Getting this wrong can result not only in demands for arrears of tax and NICs, but also for interest on those arrears.

Employees should be paid with PAYE operated on their employment income. The employer is entitled to deduct the PAYE from the employees gross pay and so it costs the employer nothing extra. However, if PAYE is not operated and the Revenue later decides it was due, it is the employer to whom the Revenue looks to make good any underpayment. By this time it may well be impossible for the employer to recover the cost from the employee, as PAYE may generally only be recovered from payments of remuneration. On the other hand, self-employed workers are responsible for their own tax and may legitimately be paid gross.

Self-employed workers currently pay Class 2 NICs of £2.10 per week and, if their income warrants it, Class 4 contributions at 8% on profits between £5,035 and £33,540 in the tax year, with a 1% liability on profits over this level. There is no liability for the person or organisation that provides the work to make contributions if the worker is self-employed.
In contrast, if the worker is an employee, not only is there the employees Class 1 primary NICs at 11% on earnings between £5,035 and £33,540 in the tax year, but there is also a liability for the work-giver/employer/engager of 12.8% on all payments over £5,035 with no upper limit. But the extra payments serve a purpose. Those who have a record of Class 1 contributions are entitled to a greater range of state benefits, particularly Jobseekers Allowance, than those without. But, as the rates show, entitlement comes at a price: not only for the artist concerned but for the engager as well.

To ensure that performers do not miss out on gaining a Class 1 contribution record, the NI legislation and associated regulations that apply to this group are particularly detailed. The general principles used to determine who is employed and who is self-employed that apply to engagements of all kinds are augmented by specific rules for anyone employed as an actor, singer or musician or in any similar performing capacity.

Contract concentration

Administrators should therefore look carefully at the terms of all contracts with performers that their organisation enters into. Is the performer being engaged for a specific role, performance or season? Or, is he or she an employee on normal principles, with a long engagement, a notice period and the likelihood of having to take several parts at the direction and discretion of the engager? If the latter, he or she probably needs to go on the payroll like any other employee.

However, if the performer appears to be self-employed, that is not the end of the matter. In such situations, the terms of the engagement must be considered carefully and if any element of salary is paid, then all of the earnings must be paid under deduction of Class 1 NICs, regardless of the fact that the performer is not an employee. Note that this does not affect the tax position the entertainer may well be self-employed for tax, without PAYE deduction, but nevertheless be subject to employee NIC deductions.

At first glance, it might be thought that this is a theoretical problem, since self-employed artistes are not paid a salary in the normal sense of the word. However, salary in this context has a special meaning and is defined by four tests:

” payments made for services rendered
” paid under a contract for services
” paid at specific period or interval where there is more than one payment
” calculated by reference to the amount of time for which the work has been performed.

All four tests need to be satisfied and it was failing the fourth test that enabled many orchestras to continue with gross payment following the Revenues demands last year for Class 1 NICs on fees paid to freelance musicians. Session fees, flat-rate overtime payments and overall fees for rehearsal periods and/or performance(s) are therefore preferable to hourly rates and paying time-based remuneration if the engager is to avoid NIC liability.

Reflective terms

A word of caution. Written terms are very good evidence of the terms of an agreement, but they need to reflect what actually happens. Custom and practice or additional agreements that alter the written terms should not be allowed to creep in if they will result in all four aspects of the salary test being satisfied.