Special NICs rules for entertainers

Changes to the rules governing the NICs liabilities of entertainers were made by The Social Security (Categorisation of Earners) Amendment Regulations 2003 from 6 April 2003. The principle change is to the definition of "salary" and a brief news item set out the new definition at the time. In the latest Tax Bulletin (issue 65), the Revenue has published a detailed article explaining the changes and their implications.

Employers of entertainers, in many cases, are required to treat them as employed earnings and have a liability to deduct Class 1 NICs from payments made to them, even though most entertainers are engaged under contracts for services and thereby subject to income tax under Schedule D. Such employers must read this article in Tax Bulletin 65.

The special rules that designate entertainers as employed earners for NICs purposes but not for income tax were introduced in 1998 to ensure they would have entitlement to contribution-based Jobseeker's Allowance to cover long periods without work while they established themselves. At the time the 1998 Categorisation of Earnings Regulations were introduced, the only entertainers who were not paying Class 1 NICs were 'key talent' stars who were regarded as having been engaged on productions because they were celebrities. To preserve the situation where most entertainers paid Class 1 NICs, the statutory requirement was that liability for Class 1 NICs arose for entertainers whose earnings consisted "wholly or mainly of salary". Those entertainers who negotiated a fee or received rights and additional use payments higher than the salary element were not liable to pay Class 1 NICs but were regarded as self-employed.

In practice, the 1998 Regulations have not worked. In addition to their salary, most entertainers receive pre-purchase payments as compensation for the loss of future repeat fees and rights and royalties. Because these can be worth many times their salary, they are not paid "wholly or mainly" by salary and are not, as a result, paying Class 1 NICs.

The change in the definition of "salary" in the new Regulations is intended to maintain the Revenue's original intention of keeping most entertainers within the category of employed earners for NICs purposes. If any part of an entertainer's remuneration is salary, the whole of the remuneration from the engagement, including rights payments, becomes liable for Class 1 NICs. If there is no salary, and the contract makes it clear that that is so, the entertainer is treated as being self-employed and liable for Class 2 and 4 NICs instead.

Payments that are treated as "salary" are payments for attendance day and standby days, holiday pay, overtime and retainers. Payments that are "rights payments" are additional use fees, payments for secondary sales, repeat fees and option fees. Engagement fees may be salary or negotiable payments depending on the type of Equity contract.
The term "salary" requires remuneration to meet all four of the following conditions:

• made for services rendered
• paid under a contract for services
• where there is more than one payment, payable at a specified period or interval; and
• computed by reference to the amount of time for which work has been performed.

The third condition ensures that payments made to entertainers engaged for a day or two as film extras or walk-on parts are treated as "salary", even though only one payment in made. The fourth condition excludes key talent artistes whose remuneration is not related directly to the period of time they are assigned to the production.

Session musicians and singers are excepted from the new Regulations and their earnings are not subject to Class 1 NICs.

Where an entertainer is supplied by an agency (but not a personal service company), it is the producer of the entertainment who is treated as the secondary contributor.

The Tax Bulletin article also includes instructions for entertainers to claim a refund of Class 1 NICs if they believe they were wrongly categorised as employed earners between 1998 and 2003.
(Source: www.inlandrevenue.gov.uk/bulletins/tb65.pdf )
...back to 27 June 2003

Review of employment status

At the same time as introducing major changes to employment legislation, the Government is consulting on the inconsistencies that exist in the way that different categories of workers are entitled, or not entitled, to the many employment rights. For example, the provisions of the Employment Rights Act 1996 apply to "employees", whereas the Working Time Regulations and the National Minimum Wage Act apply to "workers". Other workers are defined as homeworkers, agency workers, casual workers, labour-only subcontractors, office holders and clergy, but their employment rights vary considerably.

The Government already has the powers to change which workers or employees are entitled to which employment rights, set out in section 23 of the Employment Rights Act 1996. A consultation document has now been published and the Government is seeking views on how these differences might be rationalised and made more consistent. The document is available at www.dti.gov.uk/er/individual/statusdiscuss.pdf and the consultation period closes on 11 December 2002.
Payroll Briefing 5 - 28 August 2002

Employment status guidance

The Revenue's booklet IR148 Are your workers employed or self-employed? is written especially to give guidance to contractors in the construction industry. It has now been updated to incorporate the terminology of the revised construction industry scheme. However, it continues to be one of the best short guides on employment status issues for all employers and, for those interested in detailed guidance on the subject, it refers to the Revenue's own internal Employment Status manuals, available on the Internet at www.inlandrevenue.gov.uk/manuals/esmmanual. Curiously, the revised booklet continues to refer to booklet P7 Employer's further guide to Pay As You Earn, that was replaced by the CWG2 Further Guide several years ago. - Payroll Briefing 201 - 9 May 2001