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What is IR35 and does it affect you?
The IR35 regulations were introduced on 6th April 2000 and affect individuals who operate ‘personal service companies’.
The regulations were introduced to tackle the avoidance of tax and National Insurance by personal service companies. However, they have stated that the ‘legitimate’ use of service companies will not be caught. This therefore provides for such companies as yours to operate outside IR35. Part of this process is known as the ‘IR35 Test’.
This test hinges on the wording of the contract and your general working practices. We at Stilwell Gray pride ourselves on providing tailored advice and feel therefore long narrative and worked examples are not what is required. Contact us for full and comprehensive advice.
However as a basic outline:
IR35 affects those companies which the Inland Revenue deems are not genuine companies in terms of the services being provided and are merely in disguised employment.
Treatment of income under the new rules
If the Inland Revenue believes that the company is in fact in disguised employment, the tax administration of the distribution of the income will alter. The total income of your company, less allowable expenses, salary payments and 5% of the gross income, will be treated as if it were salary and therefore be subject to tax and National Insurance, both employers and employees, on the full amount. As this figure is not actually a salary it is referred to by the Revenue as a ‘deemed payment’.
Deemed Payments
These are calculated on each contract undertaken, or each individual service being provided, by the company and not necessarily on the whole income of the company.
It will be necessary to review each contract, or service provided, to establish whether it falls under the new rules for IR35. We will need to calculate the amount of the ‘deemed payments’ at the company year end and at the 5th April.
As the deemed payment is to be taxed in the same way as a salary payment, the tax and National Insurance due, in respect of the deemed payment, for the tax year 6th April 2000 to 5th April 2001, will be payable by the 19th April 2001. It is therefore imperative that details are available to calculate the figures at 5th April 2001.
Will your income fall under the new IR35 Rules?
The Revenue will try to establish whether an individual who supplies their services through an intermediary, such as a service company, would have been an employee of the client if they had been engaged directly by the client company. As a guideline the Revenue will be looking to see if you would fulfil the criteria under the current rules for self employment.
This decision will be based on a series of facts. However, as with all Revenue legislation these facts will be open to interpretation and grey areas will exist.
The services your company provide and the method of this provision will be crucial and therefore the wording of the contract will be very important.
Points to watch:
Control
How much control do you have over the services you provide?
Substitute worker
Can you provide a substitute in the case of your absence?
Provision of equipment
Do you provide your own equipment?
Financial risk
Do you take financial risk?
Method of payment
How and on what terms are you paid?
Opportunity to profit from sound management
Do you benefit from a well run company?
Part and parcel of the organisation
Are you part of the company's set up? Do you manage staff?
Employee Benefits
Do you receive any benefits that a normal employee receives?
Length of engagement
How long have you worked for the client?
Professional Indemnity insurance
Are you required to be covered by this insurance?
Intention
It is the reality of the situation that matters. It is not enough to call a person ‘self employed’ if all the terms and conditions of the engagement point towards employment.
Based on answers to the above questions, we should be able to determine whether IR35 impacts on you or not.
To enable Stilwell Gray to make a decision regarding the status of your current and future contracts, please contact us
Comparisons
Many people have asked for the relevant figures if they were to be paid as a PAYE employee. When comparing company income with income earned as a PAYE salary you must take into account the costs, to the client, of factors such as the employers National Insurance. It is not possible to make a direct comparison of company income of £50,000 with an annual salary of £50,000.
If the client were to pay a gross annual amount of £50,000, the amount paid to the company would be £50,000. The amount paid to an individual employee would be reduced to take into account factors such as employers National Insurance (the cost in this instance being £4,967), potential sick pay and holiday pay.
Taking into account the above factors the net figure arrived at through a limited company is higher than that arrived at through PAYE salary payments. Most importantly as a contractor you should be able to command higher rates of pay.
Alternative options and points raised
We have been asked our opinion on many schemes and alternatives to counter IR35 and other factors in respect of the implementation of IR35. Most alternative schemes have been pre-empted by the Inland Revenue and other options are not open to contractors.
Consultancy Companies
A common suggestion has been that a company be set up comprising of several contractors. This will not affect the way that the Revenue will review each contract. Therefore the income to such a company would be taxed in exactly the same way as if each contractor had worked through his own company.
You should also take into account the cost of drawing up a Shareholders agreement, which would be essential to avoid possible disagreements over the distribution of income and share of costs. The Revenue have stated in particular they will be looking at companies where the income is distributed in a ratio to the income brought into the company by each individual contractor.
Offshore Companies
The same rules in deciding the status of each contract will apply to offshore companies. If an offshore company fails to deduct and account for tax and NICs, under the legislation, liability to pay can be transferred to the worker. The Revenue has powers to obtain details of payments to offshore companies from the records of clients and agencies.
Self Employment
This option would certainly reduce the NIC burden. However due to the current PAYE legislation agencies and clients are not prepared to take the risk of entering into a contract with an individual on a self employed basis. This is because if the Revenue decided that the contract had been entered into incorrectly and the status of the individual was that of an employee, the agency or client would have to bear the cost of the increased tax liability.
Alternative wording of contracts
As we have stressed above, the wording of your contract is all important. When considering a new contract you must ask your agency whether they have taken any steps to amend the wording of their contracts, to take into account the new rules for IR35. If nothing has been done, firstly ask why the agency has done nothing and secondly check whether the agency and their client would be prepared to change the wording of the contract should alternative wording be suggested.
In conclusion
Stilwell Gray will continue to oppose IR35 and consider the best options to counter the impact of IR35. It should be noted that we are up against the Government through the Inland Revenue on this issue and therefore quite a mighty organisation, however, concessions have already been made. You may wish to visit the Professional Contractors Group IR35 website for more information on IR35 and details on how you may continue to oppose the implementation of IR35.
IR35 is a milestone in respect of tax legislation and therefore the full implications and practical implementation will take several years to resolve. All arguments for and against IR35 will be formalised through case law and therefore grey areas will persist for many years.
For full guide to IR35, please download the inland Revenue Booklet - be sure to check the Inland Revenue website for the most up to date IR35 information.
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