Tax cloud over telecottages

Rules on self-employment threaten new work centres

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.

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. But in some areas of the country, the Inland Revenue is considering assessing them as employees of the telecottage. 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. 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. 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. 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. 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. 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. Also potentially significant are the place where the work is undertaken, and the ownership of the equipment used. 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. 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. As with other self-employed versus Schedule E cases, we would look at each one on an individual basis.''