At McDade Roberts accountants we help hundreds of businesses and individuals navigate the world of tax. One question that we get asked is about IR35 so if you would like to know more, read on.
The 'IR35' rules are designed to prevent the avoidance of tax and national insurance contributions (NICs) through the use of personal service companies and partnerships.
The rules do not stop individuals selling their services through either their own personal companies or a partnership. However, they do seek to remove any possible tax advantages from doing so.
Removal Of Tax Advantages
The tax advantages mainly arise by extracting the net taxable profits of the company by way of dividend. This avoids any national insurance contributions (NICs) which would generally have been due if that profit had been extracted by way of remuneration or bonus. The intention is to tax most of the income of the company as if it were the salary of the person doing the work.
To Whom Does It Apply?
The rules apply if, had the individual sold his/her services directly rather than through a company (or partnership), he/she would have been classed (by HMRC) as employed rather than self-employed.
Employment V Self-Employment
One of the major issues under the rules is to establish whether particular relationships or contracts are caught. This is because the dividing line between employment and self-employment has always been a fine one.
HMRC Will Consider The Following To Decide Whether A Contract Is Caught Under The Rules
|
Mutuality of obligation
|
the customer will offer work and the worker accept it as an ongoing understanding?
|
|
Control
|
the customer has control over tasks undertaken/hours worked etc?
|
|
Equipment
|
the customer provides all of the necessary equipment?
|
|
Substitution
|
the individual can do the job himself or send a substitute?
|
|
Financial risk
|
the company (or partnership) bears financial risk?
|
|
Basis of payment
|
the company (or partnership) is paid a fixed sum for a particular job?
|
|
Benefits
|
the individual is entitled to sick pay, holiday pay, expenses etc?
|
|
Intention
|
the customer and the worker have agreed there is no intention of an employment relationship?
|
|
Personal factors
|
the individual works for a number of different customers and the company (or partnership) obtains new work in a business-like way?
|
How The Rules Operate
The company operates PAYE & NICs on actual payments of salary to the individual during the year in the normal way. If, at the end of the tax year - ie 5 April, the individual's salary from the company, including benefits in kind, amounts to less than the company's income from all of the contracts to which the rules apply, then the difference (net of allowable expenses) is deemed to have been paid to the individual as salary on 5 April and PAYE/NICs are due.
Allowable Expenses:
- normal employment expenses (eg travel)
- certain capital allowances
- employer pension contributions
- employers' NICs - both actually paid and due on any deemed salary
- 5% of the gross income to cover all other expenses.
Where salary is deemed in this way:
- appropriate deductions are allowed in arriving at corporation tax profits and
- no further tax/NICs are due if the individual subsequently withdraws the money from the company in a HMRC approved manner (see below).
Extracting Funds From The Company
For income earned from contracts which are likely to be caught by the rules, the choices available to extract funds for living expenses include:
- paying a salary
- borrowing from the company and repaying the loan out of salary as 5 April approaches
- paying interim dividends.
Getting Ready For 5 April
- the deemed payment is treated as if an actual payment had been made by the company on 5 April
- tax and NICs have to be paid to HMRC by 19 April
- final RTI submissions showing details of the deemed payment has to be submitted to HMRC by 19 April.
Partnerships
Where individuals sell their services through a partnership, the rules are applied to any income arising which would have been taxed as employment income if the partnership had not existed.
Many partnerships are not caught by the rules even if one or more of the partners performs work for a client which may have the qualities of an employment contract.
The rules will only apply to partnerships where:
- an individual, (either alone or with one or more relatives), is entitled to 60% or more of the profits or
- all or most of the partnership's income comes from 'employment contracts' with a single customer or
- any of the partners' profit share is based on the amount of income from 'employment contracts'.
Penalties
Where a personal service company or partnership fails to deduct and account for PAYE/NICs due under the rules, the normal penalty provisions apply. If the company or partnership fails to pay, it will be possible for the tax and NICs due to be collected from the individual as happens in certain circumstances under existing PAYE and NIC legislation.
Intermediaries - Travel And Subsistence
Tax relief is not available on travel and subsistence expenses for workers engaged through an employment intermediary, such as a recruitment agency or a personal service company.
No relief is allowed for home to work travel and subsistence where a worker:
- personally provides services to another person
- is employed through an employment intermediary
- is under (the right of) the supervision, direction or control of any person, in the manner in which they undertake their work.
Off-Payroll Working In The Public Sector
Rules have been introduced which affect the operation of IR35 in relation to engagements in the public sector. Please contact us for more details on this point as it can get complicated.
Off-Payroll Working Rules In The Private Sector
New tax rules apply to individuals who provide their personal services via an 'intermediary' to a medium or large business. The new rules apply to payments made for services provided on or after 6 April 2021.
The off-payroll working rules apply where an individual (the worker) provides their services through an intermediary (typically a personal service company) to another person or entity (the client). The client will be required to make a determination of a worker's status and communicate that determination. In addition, the fee-payer will need to make deductions for income tax and NICs and pay any employer NICs.
The legislation uses an existing statutory definition within the Companies Act of a 'small company' to exempt small businesses from the new rules.
How McDade Accountants in Preston, Longridge and Bamber Bridge Can Help
Confused? Don't be. We can advise as to the best course of action in your own particular circumstances. If IR35 does apply to you we can help with the necessary record keeping and calculations so please do contact us. The first consultation is always free so you have nothing to lose.