The position of individuals who use telecottages is less clear-cut

The position of individuals who use telecottages is less clear-cut.An Inland Revenue spokeswoman said: “People’s employment status depends very much on the facts of their case, and we don’t have special rules for teleworkers. These last factors in particular may persuade tax inspectors that telecottages are, in effect, employers.The Revenue also already has powers, under a 1988 Act, to ensure that agencies deduct PAYE from the salaries of workers they place with clients Home-based workers are excluded from these powers. Also potentially significant are the place where the work is undertaken, and the ownership of the equipment used. Is your window-cleaner your employee, for example? Probably not – but your daily help certainly is, even if very few people realise that and deduct PAYE.”In its booklet Employed or Self- Employed?, the Inland Revenue lists a range of factors that it takes into account.These include the nature of the work relationship, the degree of managerial control, the provision or otherwise of employee perks such as sick pay and holidays, and whether set hours are worked. She argued that the Inland Revenue should develop a national policy for the tax treatment of telecottage-based work, rather than leaving the issue to the discretion of local tax inspectors.Several recent cases, including a High Court test case, have successfully challenged the Revenue’s interpretation of what constitutes employee status.Everyone admits that a large grey area remains.Jeff Gitter, of the accountants Lubbock Fine, said: “It’s not easy. But the Inland Revenue reserves the right to rule on each contract.”Ms Berry’s concern was echoed by Liz Webb, at East Kent telecottage in Smeeth, near Ashford. However, at the Wren telecottage, the tax problems mean that Ms Berry has had to postpone plans that would have brought work for a number of freelance computer programmers to her centre.”The issue impinges on telecottages as a whole, and the whole idea of network brokerage.

One reason we’re here is to try to get small businesses to interact with each other and with large companies,” she said.”We’re trying to be pro-active, getting work in and sub-contracting it out. Consequently, many have been marketing their facilities to potential corporate clients, looking for work that local people can undertake on their premises.A typical telecottage offers IT training and access to computer hardware, allowing local people to access data held on distant computer mainframes via the telephone network. This would also force the entity to pay National Insurance contributions for all its staff.That attitude is viewed with disappointment by some staff. “Work patterns are in flux – but the tax laws sometimes seem to be written in stone,” said Jane Berry, manager of the Warwickshire Rural Enterprise Network telecottage at Stoneleigh, near Coventry.”The Inland Revenue may be acting as a barrier to the development of new methods of working,” she added.Over the last four years about 120 telecottages have been set up in Britain, from the Isles Telecroft in northern Shetland, to Mevagissey Telecottage in Cornwall.The idea, which came originally from Scandinavia, is based on the premise that developments in computer and telecoms technology permit new forms of remote working.While some telecottages are run as straight commercial ventures, many have been established as community ventures – generally with initial grant- funding from local authorities or rural development bodies.To survive in the longer term, however, telecottages have to generate their own funds. But in some areas of the country, the Inland Revenue is considering assessing them as employees of the telecottage.

Telecottages, set up to enable people to work with the latest technology via the new information “superhighways”, could flounder on uncertainties over employment status.
Telecottage workers believe they should be treated as self-employed, and so be entitled to marginally more generous treatment from the taxman. In these cases, the building society is prepared to include the monthly payments in its loan calculations.. A HI-TECH system of work organisation that could help regenerate the local economies of run-down rural areas may fall foul of tax rules. But even though staff benefited from the scheme, they asked to have it changed so that some of the money was included in basic wages.This was because pension and overtime were calculated on the basic rate.Peter Duboff, of the accountants Duboff & Co, said that mortgages could also be affected by PRP schemes: “Mortgage lenders vary in their assessments of pay for loan purposes – it’s best to talk to them individually to find out.” Lower basic pay could lead to less money being lent for home purchases.A Bradford & Bingley spokesman said: “Where a proportion of pay genuinely depends on how the company’s profits go, most lenders act on the cautious side”.He said in most cases, however, PRP was paid monthly as part of income, as a tax-efficient way of receiving pay. It holds back the remaining 5 per cent.Even if the bank misses the profit target and the 5 per cent is never received, the staff will have earned more in net terms than last year.

Lloyds does not ask for its money back.Derek Silver, general personnel manager of Gallaher UK, the US-owned tobacco company, stressed the need for trust in employer-employee relations for PRP to succeed.Gallaher has paid staff bonuses as PRP since 1987. It isn’t formally guaranteed, though.”In practice, clawbacks are not common. Lloyds Bank’s PRP salary sacrifice scheme pays 95 per cent of PRP out to staff each month. To introduce a PRP scheme, a company must convince 80 per cent of its staff to vote in favour.David Tuch, tax partner at the accountants KPMG, said: “There is an assurance by the company that if they miss profit targets, it will do something to make sure staff don’t lose out. However, union critics claim – and some employers privately admit – that PRP is often used to keep pay settlements down, transferring to the taxpayer the burden of increases in take-home pay. Other alternatives mean they share that tax saving with their employers. Or they get the same net pay, while the saving is creamed off by the company.According to the Confederation of British Industry, an employers’ organisation, PRP motivates staff, boosting both company balance sheets and pay packets.But Rob Donnelly, the CBI head of employee relations, admitted it can be difficult, especially in larger companies, to measure the precise link between profit and performance.Sarah Kling, a partner at Coopers & Lybrand, the accountants, also backed PRP, arguing that money not paid in income tax filters back into the system – through corporation tax on profits, and VAT on additional spending.

Staff take a cut in basic salary, up to a limit of 20 per cent. In some cases, employees benefit from the whole of the tax savings. PRP is normally introduced into renumeration packages in one of four ways:q As a tax-efficient and self-financing new bonus scheme, or part of one.q As a replacement, or part-replacement, of an existing bonus scheme.q Instead of all, or part of, a pay increase. If pay rises in successive years take the form of PRP, this gradually becomes more tax-efficient.q Instead of part of existing pay, under a salary sacrifice arrangement. PRP schemes must be registered with the Inland Revenue and must disclose how payouts will be calculated. I find it hard at an economic level to find much justification for it to continue in its current form.”PRP permits the lower figure of £4,000 or 20 per cent of salary to be paid tax-free, if specific profit targets are reached by a company’s year- end. When profits fall, so can pay.Lower labour costs generated with extra money clawed back from taxes would lead to companies taking on more staff, it was believed when PRP was introduced in 1987.In fact, Andrew Dilnot, director of the Institute of Fiscal Studies, believes the opposite has happened: “It merely encourages companies and staff to collude to get deals that in no meaningful way incentivise staff performance PRP subsidises people in employment.