Redundancy/compensation for the self-employed

[neilsolaris]

Hi,

I have some colleagues in the music businesses, who were, until about May last year, working for a West End show (I'll be discreet and not name the show if that's ok). The band were all employed on a self-employed basis. They are required to turn up for a certain percentage of shows, but they are allowed to dep the shows out, plus they provide their own tools (their instruments), so I guess that's how they are able to class them as self-employed.

So, last year, due largely to Covid, it was announced that they would no longer be employed for the show. They were paid redundancy though, based on their age and length of service. However, they weren't provided with a P45.

My friend who played for this show, got a redundancy payment which was well under £30,000. She told me that her accountant was unsure whether this payment she received was actually tax free or not, given that it was a self-employed arrangement. It seems her ex colleagues are equally uncertain where they stand at the moment.

Does anyone have any views about whether this is a tax free redundancy payment, given the situation? I'm just very curious to understand what's going on.

Many thanks.

 

[UK Contractor Accountant]

Self employed do not get redundancy pay - it's compensation for ending the Contract for Services. Taxable in full as part of SE earnings.

 

[neilsolaris]

Many thanks for that. That's interesting to know. She won't be happy, but I won't get involved!

 

[paulears]

I'm amazed with the question. Virtually all West End musicians are MU members and they all know how things are done - it's not changed for years. They're self-employed and very keen to retain that status. How does a self-employed person even think they get redundancy pay? Don;t get it at all.

 

[neilsolaris]

I'm amazed with the question. Virtually all West End musicians are MU members and they all know how things are done - it's not changed for years. They're self-employed and very keen to retain that status. How does a self-employed person even think they get redundancy pay? Don;t get it at all.

Well, they know they're self employed, that's not in question. But none of them have ever been made "redundant" before (or had their contracts terminated after years of service). This is new to them.

I believe that they were eligible for a workplace pension, so they might be unaware of what rights they do or don't have.

 

[Paul Norman]

In legal terms, they have not been made redundant. That refers to a particular way of ending a contract of employment.

This payment has no legal status - it was a decent thing to do, but was not a requirement.

It is, therefore, taxable.

 

[neilsolaris]

Many thanks Paul.

 

[paulears]

Plenty of people, like me, had signed contracts for future jobs, and they just vanished too - I think the production companies did what they had to do pretty well, to be fair.

 

[neilsolaris]

By the way, seeing as this a compensation payment and is part of her self-employed earnings, would it simply be included with all her other self-employed income in the income box on the self-assessment form (box 47 I believe on the self-assessment form)?

Sorry if it's a dumb question.

 

[neilsolaris]

Just an update. My friend spoke to the Musicians Union, and also HMRC, and they gave this advice. In your views, is the information she has been given incorrect? It seems to me that the advice HMRC gave her contradicts to the above.

Many thanks again for any further clarity on this.

"The agreement itself refers to the payment as a ‘compensation payment’ which on the 2nd page of this document from HMRC,

https://assets.publishing.service.g...ds/attachment_data/file/787523/SA101_2019.pdf

gives the £30,000 limit for compensation payments as tax-free and as long as your accountant puts the income into that box on your tax return, that portion should be tax-free."

 

[STDFR33]

The advice from HMRC is wrong (unsurprisingly).

 

[neilsolaris]

The advice from HMRC is wrong (unsurprisingly).

I did wonder! When I speak to her next time I'll suggest she trusts her accountant, and also keeps in touch with her former colleagues who are in the same boat.

 

[neilsolaris]

So, since I posted to this thread I've heard from my colleague. This is what they have been advised.

Even if you're not an employee, you can do a deal and set up a contract that states that you will receive compensation when the work stops. That compensation can be in line with statutory redundancy (like above), even though it obviously isn't. As it is compensation, as per the contract, it goes in box 9 on the second page of this form.

https://assets.publishing.service.g...ds/attachment_data/file/787523/SA101_2019.pdf

I'm not claiming this is correct, but I'm just showing what they've been advised. It does seem to make sense to me. Otherwise, what would that compensation box for?

I'd be interested in your thoughts.

 

[UK Contractor Accountant]

, what would that compensation box for?

As it states on the form & guide notes - compensation for loss of 'office' of employment.

Unless these Self Employed musicians have actually gone to Court and/or employment Tribunal to determine that they are actually 'workers' with employment rights (e.g Uber Drivers) the compensation payment is to be regarded as self employed earnings taxable in full.

 

[neilsolaris]

As it states on the form & guide notes - compensation for loss of 'office' of employment.

Unless these Self Employed musicians have actually gone to Court and/or employment Tribunal to determine that they are actually 'workers' with employment rights (e.g Uber Drivers) the compensation payment is to be regarded as self employed earnings taxable in full.

Thanks for your advice. I don't know what relevance this is, but they are arguing that this is loss of employment, not loss of office (there's a difference isn't there?), and that the payment comes from the contract. I'm not disputing you though, I'm just putting forward what they've been advised.

I do note though, that the £30k tax free compensation limit seems to apply to non-contractual payments only, so I'm starting to doubt the advice she was given myself! I guess time will tell.

 

[UKSBD]

Have you read this - https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim41805

 

[UK Contractor Accountant]

and that the payment comes from the contract.

if of course, the signed Contract they have implied that they are 'Workers' with employment rights then yes the contractural payment can be treated as redundancy pay subject to the £30K limit.

Have a read of the decision on trhe Charlie Mullins case - synpet of ruling below:

The Supreme Court has delivered its ruling on the landmark Pimlico Plumbers case, upholding previous decisions that an ostensibly ‘self employed’ plumber was in fact properly classified as a ‘worker’ with valuable employment rights under UK law (including discrimination protection and holiday pay). The case has been closely monitored because of its impact on organisations engaging large numbers of individuals on a self-employed basis, including those operating in the ‘gig economy’.

 

[neilsolaris]

Have you read this - https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim41805

Many thanks UKSBD, that looks very relevant to my friend's case. I'll go through it more thoroughly later. But at first glance, it seems that if the contract stated they'd receive compensation, then that would mean that it would be taxable.

 

[neilsolaris]

if of course, the signed Contract they have implied that they are 'Workers' with employment rights then yes the contractural payment can be treated as redundancy pay subject to the £30K limit.

Have a read of the decision on trhe Charlie Mullins case - synpet of ruling below:

The Supreme Court has delivered its ruling on the landmark Pimlico Plumbers case, upholding previous decisions that an ostensibly ‘self employed’ plumber was in fact properly classified as a ‘worker’ with valuable employment rights under UK law (including discrimination protection and holiday pay). The case has been closely monitored because of its impact on organisations engaging large numbers of individuals on a self-employed basis, including those operating in the ‘gig economy’.

Thanks for the info. I do remember that Pimlico Plumbers case. I've always been a bit surprised how the musicians were able to be classed as self employed in this situation. But at the same time, I assumed the company they worked for (I won't name them but they are very big) would have had top legal advice and not left any stones unturned. It would be very costly to the company if they were reclassed as workers, wouldn't it?

 

[UK Contractor Accountant]

t would be very costly to the company if they were reclassed as workers, wouldn't it?

i think it was more to do with having 'workers' rights such as holiday pay, redundany etc rather than be reclassified as employees.

 

[UKSBD]

Many thanks UKSBD, that looks very relevant to my friend's case. I'll go through it more thoroughly later. But at first glance, it seems that if the contract stated they'd receive compensation, then that would mean that it would be taxable.

It does say it is for Loss of Office though, so may not apply

Interestingly though in one of the case studies - https://www.accaglobal.com/uk/en/te...es-search/2013/january/tc-simpson-v-john.html The snippet gives the impression the person wasn't an employee (the full ruling may say different though)

 

[Paul Kelly ICHYB]

She told me that her accountant was unsure whether this payment she received was actually tax free or not

This issue also means that it is time for a new accountant!

 

[Newchodge]

If (an employment) contract states that something is contractual, such as the right to a bonus payment, the bonus payment is taxable. If the bonus payment is not paid the (employer) is in breach of contract and may pay a sum for compensation for breach of contract. That sum is not taxable. So if the 'redundnacy' payment is contractual, it should be taxed.

 

[neilsolaris]

If (an employment) contract states that something is contractual, such as the right to a bonus payment, the bonus payment is taxable. If the bonus payment is not paid the (employer) is in breach of contract and may pay a sum for compensation for breach of contract. That sum is not taxable. So if the 'redundnacy' payment is contractual, it should be taxed.

Thanks Newchodge. I'll seek out information about whether this payment was definitely contractual or not. I'm cautious not to poke my nose in too far, but I'm just very interested to know for my own education!

 

[Ellia]

It depends on the contract., contract of employment or contract for providing services. If they were self-employment basis, the payments were gross without any deductions, they were regarded as a supplier of the service, not an employee. The redundancy payment of £30,000 tax-free is only for an employee having a contract of employment.