Anti-avoidance measures to counter the use of limited companies by certain individuals who provide their personal services to other businesses in this way have been in force for many years. This legislation, commonly referred to as IR35, is aimed at individuals, who provide their personal services through limited companies. This will apply even where the service company is incorporated or resident abroad as it is treated as having a place of business in the UK if a worker living in the UK does work for a client in the UK. If the worker concerned would be unable to provide his services as a self- employed person because he would be regarded as an employee or is an office holder such as a non-executive director of the engaging company, the legislation acts to restrict the taxation advantages that would otherwise be obtained.
HMRC acknowledge that whilst the duties as the holder of the office of non-executive director have been brought under IR35, this will not apply to other consultancy services unless they are provided in circumstances where the worker would be regarded as an employee if he had been engaged directly by the client.
From 6 April 2021 HMRC are putting the responsibility of deciding whether IR35 applies onto medium and large sized private sector clients as well as those in the public sector. Public sector employers have been responsible for determining employment status since 6 April 2017. Medium and large sized private sector clients should review their workforce to ensure that they operate PAYE correctly where required. The worker’s intermediary will continue to be responsible for deciding the worker’s employment status where services are provided to a small client in the private sector.
In their guidance on IR35, HMRC state that someone who works for a business is probably an employee if most of the following are true:
The individual is required to work regularly unless they are on leave;
They are required to work a minimum number of hours and expect to be paid for time worked;
A manager or supervisor is responsible for their workload, saying when a piece of work should be finished and how it should be done;
They cannot send someone else to do their work;
They receive paid holiday leave;
They are entitled to contractual or Statutory Sick Pay, Maternity Pay, or Paternity Pay;
They can join the business pension scheme;
The business’s disciplinary and grievance procedures apply to them;
They work at the business’s premises or at an address specified by the business;
Their contract sets out redundancy procedures;
The business provides the materials, tools and equipment for their work;
They only work for the business or if they do have another job, it is completely different from their work for the business;
Their contract, statement of terms and conditions or offer letter uses terms like “employer” and “employee”.
HMRC has also brought a number of high-profile cases regarding presenters engaged by television broadcasters who had provided their services via intermediary companies, and these are currently going through the courts. Due to the personalities involved these have received extensive media coverage.
The main thrust of the IR35 legislation requires individuals who run their businesses through these service companies to operate PAYE on deemed employment income of approximately 95% of the company’s turnover, less any deductible expenses and benefits paid to the individual.
Deductible expenses include pension contributions paid by the employer, and expenses incurred by the individual which would be deductible in computing his employment income, such as the costs of business travel. This counters most advantages that would otherwise be available to them, in particular, the avoidance of NIC by drawing dividends instead of salary, paying salaries to family members to utilise their personal allowances etc., and various other tax advantages.
John, a computer consultant provides his services through a limited company, and owns the entire company. It has been accepted that the company is caught by the IR35 legislation, and for the year ended 31 December 2020 its turnover was £100,000. During the year, John has been paid a salary of £18,000. The company has also paid a pension contribution of £10,000, and provides him with a car. The taxable benefit on the car is £5,000. John has incurred business expenses of £3,000 which have been reimbursed to him. PAYE must be operated on the deemed employment income for 2020/21 which amounts to £50,077, and is calculated as follows:
|Turnover relating to IR 35 activities||100,000|
|Employer’s Class 1 Nic||1,271|
|Employer’s Class 1A Nic (on Car)||690|
|Deemed Employment Income £57,039 x 100/113.8||50,122|
|Employers Class 1 Nic thereon @ 13.8%||6,917|
The measures do not place any restrictions on small one-man companies which operate other than to provide personal services. Nor does the legislation affect certain people who are entitled to provide their services as self-employed individuals, such as persons engaged within an accepted grade on film or television productions.
These provisions also apply where the individual provides his services via an intermediary, whether this is a company, individual, or partnership. Domestic workers who provide their services through an intermediary are also within the scope of this legislation.
These anti-avoidance measures cannot be circumvented by two or more individuals forming one joint service company, or by the use of partnerships as each contract should be reviewed independently.