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A Christmas Tale

20 December 2017

With ever increasing demand, Santa has had to take on huge numbers of extra helpers over recent years. Operating from Santa’s UK distribution hub in a secret highlands location, these eager elves are helping Santa get everything ready for the big day, says Lee Hamilton, a partner at leading accounting practice Blick Rothenberg.

Of course, when it comes to engaging his elves, Santa’s priority is flexible working. He needs more staff as it gets nearer the 25th but can’t possibly maintain his magical workforce through into January. Even Santa has a budget.

In the early years, it was easy for Santa. He just paid his workers a few shillings, mince pies from Mrs Claus and a bonus payment in the form of sweet sherry once the presents had been delivered. This worked perfectly well until Santa was approached by HMRC with letters about complying with National Minimum Wage legislation and operating PAYE on any cash payments made. Oh dear. Too much additional cost and all that Employers National Insurance!

Being a canny fellow, Santa realised that he could avoid this awful situation by treating his elves as self-employed. Result! That is, until the unfortunate enquiry in 2005 where HMRC deemed all of Santa’s elves to be employees for tax purposes rather than self-employed. “But the rules are so complex and difficult to understand, being based on case law going back many decades!” Santa exclaimed. HMRC wouldn’t listen. Santa had to cough up and presents very nearly got delayed that year!

Not one to be beaten, Santa then decided that he would get an offshore employment agency (North Pole Employment Agency for Elves Inc.) to employ his merry workforce in the UK. In that way, he could still avoid having to operate PAYE and pay National Insurance in the UK because the agency was outside of UK jurisdiction.

Santa very nearly got his way this time but HMRC were one step ahead. With the introduction of the offshore intermediaries legislation in 2014, HMRC were again knocking at Santa’s door, explaining that he was caught because the so called “end client” (Santa in this case) would now have the responsibility to operate PAYE where an offshore agency is involved. Back to square one.

Santa really was exasperated. However, he heard Mrs Claus mention something about IR35. “Ah Hah!”, Santa exclaimed. With IR35, he could get his elves to set-up personal service companies and then engage his elves through their companies. In this way, it would be the personal services companies’ responsibility to operate PAYE and NIC and not Santa’s! “Wonderful”, he thought, “What a wise old Santa I am!”

But Santa should not rest easy. In 2017, the government launched a consultation into IR35 in the private sector. The result of the consultation is very likely to be the reform of IR35. If this happens, Santa may well be on the hook again for operating PAYE and NIC!

As he busies himself on the shop floor with his workers this year, Santa can at least take some heart that the provision of mince pies and sweet sherry is still allowed. HMRC confirmed that he could still give these without creating a tax problem as they would be treated as a trivial benefit. A small mercy for Santa at Christmas 2017.

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