Is this legal?

[silvermusic]

A friend of mine has recently started work selling electronic office equipment over the phone for a medium size firm and asked me if I could throw some light on something he finds odd and quite frankly so do I, it's got me wondering, can't work out quite what's going on and indeed if it's legal.

They get a basic salary but no commision paid once a week, all fine and dandy there. But, they also sell extended guarantees and get a small percentage bonus for each one they sell, 10% of the cost of the guarantee. However, rather than going in with their wages and being taxed as part of their overall earnings it's paid once a week as a seperate payment into their bank accounts with no deductions on it. Am I missing something here, can this in any way be right, seems very odd to me?

 

Your friend is certain he's on PAYE for the money paid into his bank account? Is he getting payslips detailing the deductions? He shouldn't be self employed should he?

 

[silvermusic]

Yes, he's on PAYE, with pay slips showing deductions and has never been self-employed, same goes for the others employed there. No one seems to mind as this commision is a tax free bonus, normally amounts to £25-£50 a week extra. However, it just can't be right unless there's something within accounting and tax I'm not aware of, some loophole or way round it etc. I can't help wondering what other things the employer might be getting up to.

 

[Tom McClelland]

It certainly sounds wrong.

I wonder if it is as simple as your friend's employer isn't aware of the law; doesn't realise that commission/bonuses etc are PAYE taxable just like salary.

 

[andygambles]

It is possible the commissions are paid by an external company (such as the extended warranty provider) rather than the employer and made direct to the employee.

As such it is not part of their salary and is a declarable income under self assessment.

I have seen set-ups like this before.

 

[CSBob]

He needs to carefully check whatever contract he has. The company itself may be receiving a commission on the extended guarantees (this being one of the biggest money-spinners in that particular line of business, truth be told) and so class this as separate to basic salaries paid for selling the stuff in the first place. In short, commission on the sale of extended guarantees may be classed as self-employed earnings, but if so that should be clearly stipulated (and he should have been made aware of this in advance, but that's another matter entirely).

If he doesn't have a formal contract, he needs to ask his boss about this. If that commission is indeed self-employed earnings, he needs to keep track of all such payments and register for self assessment with HMRC.

 

[elaine@cheapaccounting]

Has he asked the company about this?

 

[MrPAYE]

In short, commission on the sale of extended guarantees may be classed as self-employed earnings

Highly unlikely. HMRC will always argue that these payments are 'by reason of the employment' where there is a PAYE employment in place and therefore taxable as employment income under PAYE.

It is not uncommon for incentive arrangements to be in place, provided by the third party who's product or service is being sold by the salesperson. There are special tax rules allowing the third party (not the employer) to declare these benefits and account for the tax but this is not usually permitted for cash payments and there are further complications where the employer is aware of the arrangement - in which case the payments/benefits are deemed to come from the employer for tax reporting purposes.

It seems that these payments are not being treated correctly for tax/NI but at the end of the day it is the employer's problem not the salespersons.

 

[CSBob]

Highly unlikely. HMRC will always argue that these payments are 'by reason of the employment' where there is a PAYE employment in place and therefore taxable as employment income under PAYE.

Thanks for the clarification. Excuse me while I hurry off to email a friend of mine who has clearly been operating under a misapprehension! It's not the same market, but a very similar setup.

 

[silvermusic]

Sorry it's taken so long to get back to this one, I didn't speak to him until this afternoon. To clear up the points raised so far; the guarantees are not done with a third party, it's all in-house, the payments, admin, and servicing of anything that goes wrong with the products. The owner/MD has employed a number of people for many years, so I think that can rule out lack or knowledge/experience. Yes all the staff are on PAYE with contracts in place as well. It's not a fly-by-night operation and has good name in the local area, the whole thing seems really wierd to me. He doesn't like to ask as he doesn't want to rock the boat in this new job which is understandable. But as earlier, I can't help wondering what other things this employer may be up to. The thought that comes to my mind is the service/gaurantee side of the business is maybe not going through the books.