Essential Finance - Doing the simple things well

Staff responsible for the finances of arts organisations could be putting their organisations funds at risk if they ignore the fine print when it comes to tax. Lesley Fidler explains.
The funds of arts organisations are hard won. It would be a shame, and possibly negligent, to let them slip away for want of attention to the requirements of the tax system particularly with regard to employment . One of the most common tax slip-ups is when a charity pays individuals for helping out, but does not treat those individuals as employees. In the view of Her Majestys Revenue and Customs (HMRC or the Revenue), volunteers are not paid for their services, employees are. This means that a volunteer who is paid should be treated an employee for tax purposes however small the amount that is paid in return for services. It is not sufficient to say that the worker has received less than the annual income tax personal allowance (currently £5,035 for those under 65 although this is due to increase to £5,225 next year). A volunteer may well have other income or a pension which pushes their combined income above that threshold. Form P46 needs to be given to all those who are about to be paid, unless they can produce a form P45. If the worker cannot sign statement A or B on the P46 then PAYE needs to be deducted at basic rate. (Since the start of the current tax year, a new A4 double-sided form P46 has been in use: copies of the older, smaller form should no longer be used.)

The need to operate payroll procedures on payments for work done is not confined to charities or large organisations: it applies in all circumstance where an individual is paid for work under the direct control and instruction of the arts organisation. The definition of self-employment is outside the scope of this article, but finance officers should remember that the Revenue would expect someone who has supplied their services on a self-employed basis to have an identifiable commercial set-up and to be operating an independent business. (For an article on the tax position for performers see AP issue 128)

Acquiring benefit

Not only is there an obligation to operate PAYE on payments of employment income, but Class 1 National Insurance Contributions (NICs) are also due when earnings are paid to or for the benefit of an employed earner. The primary responsibility for paying over both these deductions to HMRC is the employers and it is to the employer that the Revenue will look for payment of arrears. Where the individual is paid less than the primary earnings threshold (currently £97 per week £100 per week from next April), there is no additional cost for the employer in Class 1 secondary NICs, so many organisations cap their payments to part-timers at this level. If the earnings are nevertheless greater than the lower earnings limit (currently £84 per week £87 per week from April), a notional contributions record is awarded by HMRC, despite the fact that no contributions are actually payable on any earnings below £97. Such a record is needed for access to some contribution-related State benefits. The ability to acquire it at no cost can be a valuable benefit: hence the attraction of pitching pay in this band subject to the national minimum wage considerations discussed below.

It is, however, possible to pay volunteers expenses tax and NIC-free, and, as long as the volunteers are otherwise unremunerated for their services, costs such as travelling between home and a venue do not constitute taxable income. The Revenue will accept that up to 40p per mile for the first 10,000 miles in a tax year may be paid to someone using their own vehicle for such a journey, without a taxable profit arising. A clear distinction needs to be made between employees and volunteers because an employees journeys between home and a permanent employment location cannot be paid tax-free.

Minimum wage

HMRC polices the national minimum wage (NMW) on behalf of the Department of Trade and Industry (DTI). The current rate is £5.35 per hour for those over 21, regardless of their level of ability, productivity or effectiveness and whether or not they have other income or are over state pension age. There is a line so fine as to be indistinct between an unpaid volunteer, for example someone selling theatre programmes or staffing a box office without payment and a worker who has set hours and receives a regular but token payment for his or her help. The latter would not only be entitled to the NMW, but the employer would be required to pay it. It is not open for the individual to agree to accept less than the NMW, but on the other hand, there is nothing to prevent the individual donating the money back to the organisation. However, documentary evidence of each step should be kept to show that the wage was actually paid. Where there is no contractual arrangement between the worker and the work giver and the engagement does not have set hours, then in the DTIs view, it is unlikely that the NMW needs to be paid. The DTI guidance on the topic is open to interpretation and acknowledges that many complicated arrangements exist in the voluntary sector and it is not always clear what the employment status of certain workers/volunteers will be.

Surprise

Although there are penalties for failure to operate the NMW, an enforcement notice has first to be issued. Nevertheless, the cost of back pay could be a most unwelcome surprise for an organisation, and finance officers may wish to consider discussing grey areas with the NMW helpline on 0845 6000 678, and keeping a careful record of such discussions.

On balance, all arts organisations, whether registered as charities or not, and whether generating profits or surpluses or not, need to take as much care as any other bodies to comply with financial obligations relating to their employees because should they get it wrong the cost could prove taxing.