Self employed or running a ltd company and IR35
It is important to understand the IR35 legislation-If you’re a contractor who’s self employed or running a Limited Company you could be caught by IR35 legislation; this means you stand to lose all the tax advantages you gain as a contractor while also incurring a big fine from HMRC too.
The Intermediaries legislation was introduced on 6th April 2000. It was first proposed by the Chancellor in the 1999 Budget and details were given in the Budget press release numbered IR35. Following extensive consultation, revised proposals were announced in a new press release dated 23 September 1999. However, the legislation is now commonly referred to as ‘IR35’.
The aim of the legislation is to eliminate the avoidance of tax and National Insurance Contributions (NICs) through the use of intermediaries, such as Personal Service Companies or partnerships, in circumstances where an individual worker would otherwise –
- For tax purposes, be regarded as an employee of the client; and
- For NICs purposes, be regarded as employed in employed earner’s employment by the client.
Prior to the introduction of the legislation, an individual could avoid being taxed as an employee on payments for services and paying Class 1 NIC by providing those services through an intermediary. The worker could take the money out of the intermediary, normally a Personal Service Company, in the form of dividends instead of salary. As dividends are not liable to NICs, the use of a dividend remuneration strategy results in the worker paying less in NICs than either a conventional employee or a self-employed person. And PAYE would not apply to the dividends.
The legislation ensures that, if the relationship between the worker and the client would have been one of employment had it not been for an intermediary the worker pays broadly tax and NICs on a basis which is fair in relation to what an employee of the client would pay.
On 6 April 2007 Chapter 9 ITEPA 2003, more commonly known as the Managed Service Company (“MSC”) Legislation, was introduced. The MSC Legislation applies to individuals providing their services through intermediaries which meet the definition of a Managed Service Company.
An intermediary must consider whether the MSC Legislation applies before considering IR35. Intermediaries that do not meet the definition of an MSC must continue to consider IR35.
Occupations affected by the legislation
The legislation is not targeted at any particular occupation or business sector. It can apply in any business sector. Examples of occupations where people work through service companies run right across the board, including medical staff, chief executives of large plc’s, teaching profession, legal and accountancy staff, construction industry workers, IT contractors, engineering contractors, clerical workers and many others.
The rules will apply to you if the intermediary does not meet the definition of a Managed Service Company and you answer ‘yes’ to both the following questions.
- Would you be an employee if you worked for your client directly and not through your company or partnership?
- Does the company or partnership you work through meet certain conditions?
Supplying services through a limited company or partnership – A general guide to IR35
The IR35 rules only apply if you would have been an employee of your client, had it not been for the existence of your Personal Service Company or partnership.
If you can answer ‘yes’ to most of the following questions, you would probably have been an employee of your client for the contract in question and therefore within the new rules:
- Do you work set hours, or a given number of hours a week or a month?
- Do you have to do the work yourself rather than hire someone else to do the work for you?
- Can someone tell you at any time what to do, when to work or how to do the work?
- Are you paid by the hour, week or month?
- Can you get overtime pay?
- Do you work at the premises of the person you work for, or at a place or places he or she decides?
- Do you generally work for one client at a time, rather than having a number of contracts?
If you can answer ‘yes’ to most of the following questions, you would probably not have been an employee of your client and therefore outside the new rules:
- Do you have the final say in how you do the work for the client?
- Can you make a loss on the contract?
- Do you have to provide the main items of equipment you need to do the job for the client, not just the small tools many employees provide for themselves?
- Are you free to hire other people on your own terms to do the work you have taken on?
- If you are free to hire other people on your own terms, do you pay them out of your own pocket?
- Do you have to correct unsatisfactory work in your own time and at your own expense?
- Do you have a number of clients at the same time?
You will have to think about each contract individually. Some people will find that they have some contracts, which would have been employment and so come within the rules, and others which do not.
The number of clients you have may be relevant to the decision whether your work for each as an employee, or as a self-employed person. If you have many different clients this may indicate self-employment, and be a factor that should be considered in addition to the actual details of each contract. If you have a number of different clients, but are unsure whether you are within or outside the rules, you may wish to talk to your HM Revenue & Customs (HMRC) Enquiry Centre.
Does the company or partnership I work through meet the IR35 qualifying conditions?
If your services are supplied through a company, and the company does not meet the definition of a Managed Service Company, the IR35 rules apply if:
- you (or your family*) control more than 5 per cent of the ordinary share capital of the company or
- you (or your family*) are entitled to receive more than 5 per cent of any dividends from the company or
- you receive, or could receive, payments or benefits from the company which are not salary, but could reasonably be taken to represent payment for the services you provide to clients
If your services are supplied through a partnership of which you are a partner, and the partnership does not meet the definition of a Managed Service Company, The IR35 rules apply if:
- you (or your family*) are entitled to 60 per cent or more of the profits of the partnership or
- all or most of the partnership’s income comes from providing services to a single client or
- the profit sharing arrangements in the partnership are designed to ensure that you receive an amount based on the payments received for your services to clients
* family includes an unmarried partner
Your Personal Service Company/ partnership should operate Pay As You Earn (PAYE) and pay NICs on any payments of salary during the year in the usual way.
You may also have to pay an additional amount of tax and NICs, based on the payments received by your PSC or partnership for your services, at the end of the tax year or earlier, if you break your connection with the company or partnership during the year . Your PSC or partnership will also pay employer’s NICs on the same amount.
At the end of the tax year you will need to check that you have paid the correct amount of tax and NICs. If not, you may have to pay additional tax and NICs.
To calculate if any tax or NICs are due at the end of the year, see the notes ‘How to calculate the IR35 deemed payment’.
Does the IR35 deemed payment have to be paid as salary on 5 April?
No. The deemed payment is simply a means to calculate the tax and NICs due, whether or not any payment is actually made to the worker. It can be paid as salary, but the rules do not require this to happen. It may be given to the worker (or others) in the form of dividends, or may be retained in the Personal Service Company.
Where the PSC is treated as making a deemed payment and pays a dividend, it may make a claim for relief. If HMRC is satisfied that relief should be given in order to avoid a double charge to tax, relief is given setting the amount of the deemed payment against the dividend so as to reduce the dividend.
The deemed payment and employer’s NICs due on it can be deducted when calculating your PSC’s corporation tax.
PSCs should be aware an extra payment of tax and NICs might be due at the end of the tax year and budget accordingly.
When must I pay any additional tax and NICs?
Any tax and NICs due at the end of the tax year as a result of the calculation of the IR35 deemed payment should be paid according to the normal PAYE and NIC payment rules. The amount of the deemed payment and the tax and NICs due on it should, if possible, be included in the PAYE return by 19 April and in the Employer’s Annual Return (Form P35), which has to be sent to HMRC by 19 May.
Most of the information needed to calculate the final tax and NICs liability should be available before 5 April and it should be possible to make an estimate of the tax and NICs due at that point. It will be important to keep records of relevant income and expenditure so that you can do this.
However, if it is not possible to calculate the correct amount by 19 April, HMRC will accept a payment of a lower amount on account of the tax and NICs due, as long as it is made clear on the Employer’s Annual Return (P35) that the amount is provisional.
There will be an interest charge on any of the tax or NICs due on the deemed payment, if it is paid after 19 April. But, if you make it clear on the P35 that the amount is provisional, no penalties will be charged if you pay the correct amount by the following 31 January.
This concession on penalties will be reviewed annually to establish whether it should continue to apply for future years.
If you do not send the final amount by 31 January following the end of the tax year, HMRC will take steps to collect any unpaid tax or NICs, and any interest due. In addition penalties may be sought in cases of negligent or fraudulent conduct.
What if I stop working through my Personal Service Company or partnership before the end of the year?
If you stop working through your PSC or partnership before the end of the year, the deemed payment should be calculated in the normal way, and will be treated as having been made immediately before you stop. Please contact your HMRC Enquiry Centre or IR35 helpline (Tel No: 0300 200 3885) for further advice.
What expenses can I deduct in calculating the IR35 deemed payment?
In addition to the flat rate deduction of 5 per cent, the following expenses can be deducted in the calculation:
- Any expenses met by your company or partnership that an employee of the client would have been able to claim against income tax if he or she had spent the money personally (such as certain travel expenses, professional subscriptions and premiums for professional indemnity insurance). ‘Booklet 480: Expenses and benefits – a tax guide’ provides full details. More details about travelling expenses are given in the next section.
- Any pension contributions paid by the company to an approved pension scheme for your benefit (but not for anyone else).
What travelling expenses are allowed in calculating the IR35 deemed payment?
This will depend on your pattern of working. If you work through your Personal Service Company or partnership for a series of clients in different places, you may be able to deduct the costs of travelling to your clients’ places of business. Provided you do not expect to spend more than 40 per cent of your working time at any one site you are entitled to a deduction for all journeys from home to the clients’ premises.
If you do spend more than 40 per cent of your time at a single site, but the engagement is both expected to, and actually does, last for no more than two years, a deduction for travel costs will also be available. Further details are in ‘Booklet 490: Employee Travel – a tax and National Insurance contributions guide’.
What about company cars?
For years 2002-03 onwards where:
- the intermediary provides a vehicle for you and
- you would have been entitled to an amount of mileage allowance relief for a tax year in respect of the use of the vehicle if you had been employed by the client and the vehicle had not been a company vehicle, a deduction is given at Step Three for that amount
If the Personal Service Company or partnership provides you with a car for your private use, you will have to pay tax on this benefit according to the rules that apply to other employees. The amount of the car benefit charge can be deducted (at Step 5) in calculating the deemed payment. See sections 11 and 12 of ‘Booklet 480: Expenses and benefits – a tax guide’ for further details.
Class 1A NICs paid on the company car benefit will be deductible in the calculation of the IR35 deemed payment, alongside other employer’s NICs.
Your PSC or partnership will be able to set any costs of providing the car, including capital allowances, against its taxable profits.
What do I need to put on my Self Assessment return?
The IR35 deemed payment is treated as income from employment with the Personal Service Company or partnership. It should be recorded on your Self Assessment return on the supplementary employment pages. If you have any other income from employment with the same PSC or partnership you should record the total amount, including the deemed payment.
How do I apportion expenses between engagements that are affected by the new rules and those which are not?
In calculating the IR35 deemed payment, you can deduct expenses paid by the Personal Service Company or partnership which you would have been allowed to claim against tax if you had been an employee of the client, and spent the money yourself. These expenses must relate specifically to your engagement with that client. You will have to keep suitable records to be able to identify the correct amounts.
For example, this could be by reference to car mileage to work out what part of the motoring expenses related to engagements affected by the new rules.
If a client makes a single payment in respect of two or more workers, how will the income be split between them?
This will depend on the particular facts and circumstances. If a Personal Service Company or partnership receives a payment in respect of services provided by more than one worker, the payment should be apportioned between them, by the PSC or partnership, on a reasonable basis. HMRC will re-apportion any payment if it appears the company’s or partnership’s basis of apportionment is unreasonable. The company can appeal against the decision of HMRC.
What are my tax and NICs liabilities if I work overseas?
If you work overseas your tax and NICs liabilities are the same as if you were employed directly by the overseas client.
Can I avoid the legislation by using an offshore Personal Service Company?
No. If you would have been liable to UK tax and NICs had you been employed directly by the client, you must pay UK tax and NICs under these rules, whether or not your service company is located in the UK.
If an offshore company fails to deduct and account for PAYE tax and NICs under the IR35 legislation, liability to pay tax and NICs can be transferred to you. Action to recover employer’s NICs not paid by an offshore company could also include action against any assets of that company located in the UK.
HMRC has powers to obtain details of payments to offshore companies from the records of clients and agencies.
Where can I get advice about whether the IR35 legislation applies to my contracts?
HMRC can give advice on existing contracts only.
The company or partnership is required to submit a form P35 by 19 May following the end of the tax year. Consequently, HMRC will not usually give opinions to companies/partnerships on contracts relating to a particular tax year unless all information sufficient to form an opinion is supplied prior to that date.
HMRC will review the facts. This will involve looking at whether the relationship between a worker and a client would have been one of employment, if there had been no company or partnership. In order to do this, HMRC will review the contract or contracts, which establish the relationship. They may also want talk to you and to others, including the client. It is up to you to provide all the information. If you do not or cannot do so, it may not be possible for HMRC to form an opinion.
If you do not agree with an opinion given by HMRC, and further discussion has failed to achieve agreement, you can request a formal decision against which you can appeal.
source: HMRC website