Finance: Tax concerns

Casual staff are a vital part of running a pub. But are you taxing them properly? Expert Peter Davies answers some common questions

Why should I worry?​

Each year the Inland Revenue visits in excess of 30,000 businesses ranging from large multinational organisations right down to small businesses to conduct what is known as an employer compliance review. These reviews are carried out to ensure businesses operate the PAYE system correctly on behalf of the Inland Revenue, deducting tax and national insurance from their employees and paying it to the government.

Pubs are the target of a significant number of these reviews. Time and again over the years the taxman has seen that the licensed trade has problems operating the system according to the legislation.

Getting things wrong can be costly as it is the publican who has to pay for any mistakes made and cover any tax they have failed to deduct. This is usually down to nothing more sinister than ignorance but that's no excuse if the taxman rules that your payroll isn't up to scratch.

Who has to go on my payroll?​

Put simply - everybody. Pubs, like lots of other businesses, use casual employees and often believe they need do nothing with regards to tax for casuals. But the Inland Revenue does not define "casuals" the same way that you might.

A casual employee is merely someone who does not work for you permanently and might come and go depending on how busy your business is, whether absent staff need covering, and so on. The same applies to part-time staff who might only work for you on Friday and Saturday nights or at functions. This doesn't automatically mean your employee will pay tax. But it does mean that you, as their employer, have an obligation to follow PAYE procedures just as you would with a full-time member of staff.

So how do I put staff on my payroll?​

Each time you take on a new member of staff you must obtain either a P45 form or issue a P46 form - available from your local tax office. An employee who is coming to work for you on a full-time basis may well have a P45 from their last employer. This form will tell you their details - including their national insurance number - and the tax code used by their last employer which you should carry on using until the Inland Revenue tells you differently.

But most staff probably won't have a P45, particularly if they are working part-time or have a main day job. So you need to give the employee a P46 form. This asks them to read three statements and tick which ones apply to them. This will tell you which tax code to operate on the pay you give them.

How much tax will my employee have to pay?​

This depends. Everyone has what is called a personal allowance, which is the amount of money a person can earn in a year without paying tax. This year it is £4,745. But this is a total allowance, not an allowance for each job, so if you take on a part-timer who works elsewhere they will almost certainly have used up their allowance already. Your employee will tell you this when they complete the P46 form, and as a result they will pay tax on everything they earn from you at the basic rate, which is 22 per cent. There is no lower limit for the basic rate so you will have to operate tax even if you only pay your employee £20 or so.

If your employee doesn't have any other employment they will get their personal allowance which will mean that they can earn up to £91 a week before they have to pay tax.

What about national insurance?​

Unlike tax there is no annual allowance for national insurance contributions (NICs). Each person has an amount of money which they can earn each week, from each job that they have, before paying NICs, so for NICs you don't need to worry about whether your employee has another job.

At present the threshold is also £91 per week. But beware - people who earn more than £79 per week must be entered on your payroll every week, even though they will not actually be paying any NICs. This is because they are still earning enough to qualify for benefits from the government.

What about students? I heard they don't pay tax​

Unfortunately this is an urban myth. Students are subject to the PAYE system if in a slightly different way to other employees. It will depend on when you employ the student - is it during recognised holidays or not?

The Inland Revenue defines "holidays" as summer, Christmas and Easter. If your student works for you at any other time of year - including at weekends - you should treat them as you would any other employee and get them to sign a P46.

If your student is working for you short-term in holiday time then you should give them a form P38(S), again, available from your local tax office. Once completed this means you can pay your student up to £4,745 without stopping any tax.

But again beware - if you pay them more than £79 per week you will still need to enter them on your payroll, and if you pay them more than £91 per week NICs need to be paid.

OK, I've paid someone cash-in-hand, what do I do?​

It is a fact of life that from time to time you won't be able to get someone to sign a form before you pay them. If this happens - and it should be the exception, rather than the rule - you can still run this through the payroll, but instead of the employee paying the tax you will have to pay it instead by working out how much the tax on top of the pay would be. It's a simple calculation as follows:

• Amount paid = £50.00 (or whatever the pay was)
• Divide by 78 = £0.641
• Multiply by 100 = £64.10
• Minus pay equals tax = £14.10

What happens if I don't do this?​

It's inevitable that sooner or later the Inland Revenue will ask to have a look at your payroll records. It will also have a good look through your business records - particularly the cash side of your business - and will be trying to spot payments made out of the till to employees.

Most Inland Revenue staff are pretty skilled at this and if you have paid any regular or significant amounts the chances are it will be discovered.

If you have failed to operate PAYE procedure the Revenue will do the calculations, decide how much tax is due and demand it from you. It will also charge you tax for the last six years as well, plus interest and penalties. The total can soon rack up to several thousand pounds for even a small pub with only one or two casual staff.

• Peter Davies is a PAYE consultant at Vantis Tax and previously worked with the Inland Revenue where he specialised in the hospitality industry. He can be contacted on 020 7414 0417 or at crgre.qnivrf@inagvfcyp.pbz​.

The two golden rules of taxing your staff​

• Anybody paid more than £1 per week is subject to the PAYE system
• Always obtain a P45 or P46 for everybody you pay wages.