IR35 Risks

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IR35 RISKS

There are a number of tax issues associated with a contractor running his own Limited Company. Unfortunately HMRC and the end users of your services have conspired to create an environment where “tax certainty” is difficult to achieve. We have highlighted some of the main issues below and we would like to help you minimise your IR35 risk.

IR35

For a number of years HMRC have argued that if you undertake most (if not all) of your work for a single customer then your company would be caught by legislation known as IR35. This would result in your income being tax as salary and would remove the main benefit of using a Limited Company – the use of dividends. Payment of dividends instead of salary means that HMRC lose out on the employers national insurance which they would have collected if remuneration or a bonus had been paid. In practice HMRC have not managed to get the results the IR35 legislation seeks to deliver. It is not just the wording of your written contract which is important but also your day to day behaviour whilst at work. For example you should have a “substitution clause” in your contract providing for another consultant to do the work if you are, for whatever reason, unable to fulfil your duties.

Arctic Systems case

One of the big advantages of trading through a Limited Company is the possibility to split income with a spouse or partner to ensure full basic rate tax bands are utilised. In order to do this shares can be allocated to a spouse or partner. HMRC have challenged this arrangement in Arctic Systems Limited and whilst the tax payer won this case at the House of Lords we can expect HMRC to keep a close eye on this area.

Employed or Self Employed?

Some of the key points to consider are:

Mutuality of obligation – Does the customer offer work and does the contractor accept it as an ongoing arrangement?

Control – Who has control over hours worked and tasks undertaken? The contractor or the end user?

Equipment – Does the end user provide all equipment or does the contractor utilise the assets of his company?

Substitution – Can the worker send a substitute if unable to fulfil duties?

Financial risk – Does the contractor undertake work at a fixed price?

Benefits – Is the contractor entitled to employment style benefits? eg. sick pay

Intention – Have the customer and contractor agreed that there is no intention of an employment relationship?

Personal factors – How many other customers does the contractor have?

Deemed Payments For companies caught by IR35 legislation HMRC collect PAYE/NI through what is called deemed payments. If at the end of the tax year (5 April) the individuals salary is less than the companies contractual income then the difference (net of allowable expenses) is deemed to have been paid to the contractor as salary on the 5th April and PAYE/NI is due. Allowable expenses include normal expenses such as travel, employer pension contributions, employers NIC’s, and 5% of gross income to cover all other expenses.