Personal Service Companies & IR35

IR35 is now with us. The Revenue are currently sticking to their agenda, and the principles are now in force. However, watch the press since the Professional Contractors Group (PCG) are going to the High Court. They say the proposals discriminate against single person service companies and are contrary to European law.

If the challenge is ultimately unsuccessful, then we need to be aware of the following:

Where an engagement undertaken by a worker through the medium of a service company would be treated as an employed assignment if the company did not exist, then the income arising from the contract should be treated in accordance with the IR35 proposals. This is termed “income from a relevant engagement.”

If the engagement would be interpreted as self employed, the IR35 rules would not apply.

The IR 35 proposals state that income arising from these relevant engagements should be treated as though it is a salary in the hands of the person doing the work. In other words, it falls subject to PAYE and national insurance. So, a deemed salary would be calculated.

The deemed salary is worked out as follows:

One question that is relevant here is what is a self employed engagement and what is an employed engagement. There is no statutory definition of either of these. So we have to rely on the various definitions which have developed from a series of court cases. The Inland revenue have published a leaflet IR56 ‘Employed or self employed’. this is a good starting point.

Employed?

Do you have to do the work yourself
Can someone else tell you what to do, and when to do it, at any time.
Are you paid a regular amount (per hr, week, or month)
Do you work set hours
Do you work at locations decided by others

If you answer ‘yes’ you are more likely to be regarded as employed.

Self employed?

Do you have the final say in how the business is run
Do you risk your own money
Are you responsible for meeting losses or correcting poor work at your own expense
Do you provide the major items of equipment used in the assignment
Are you free to hire others to do the job for you

If you answer ‘yes’ you are more likely to be regarded as self employed.

The content of a written contract would be looked at; so wording is vital, but note that the courts will interpret a contract in the light of the circumstances existing when it was formed. Is it a sham? Does subsequent behaviour modify or conflict with the contract?

If IR35 applies, then there will be only one deemed salary per year, and that will be treated as being on 5 April. The appropriate tax should be paid by 19 April. The Revenue have said that they would accept a payment on account by 19 April, but interest would be charged until the actual amount is declared and any balance paid.

It follows that the employee would be deemed to have received the salary regardless of whether it had been paid or not.

It is worth noting that for corporation tax purposes, the deemed salary has to be paid over, or credited to a loan account, in order for it to qualify for tax relief. The effect will be that for this sort of company corporation tax will disappear.

Action points:

• Start to negotiate your contracts instead of just signing them. Anything you can do to be seen to be operating in a manner capable of being interpreted as self employment is a good thing (ie, Don't sell labour, sell services - wording is important!). If in doubt, take advise from your accountant.
• Get a system in place to record which income is from “relevant engagements” and which is not. It is only the latter that will form part of the deemed salary calculation. Don’t forget to save up for the additional tax liability. Pay on time if you can.
• Have you got the right year end date? Take advice.
• IR35 rules may also apply to other business structures, including partnerships.

The above notes have been prepared by Martin Wild FCCA as a short guide to the “IR35 issue”. Nothing above should be construed as advice tailored to particular situations, and no liability will be accepted. Take advice on your own situation.

Useful Sites:

http://www.pcgroup.org.uk

http://www.inlandrevenue.gov.uk/ir35/index.htm