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
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.
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
Some of the key points to consider
obligation – Does the customer offer work and does the contractor accept it as an ongoing
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?
– 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
Accounts and tax advice for contractors and consultants in the Oil & Gas
and IT industries.