Intermediaries (including Personal Service Companies)
In April 2000, the Government introduced the Intermediaries legislation and provided details in the Budget press release numbered ‘IR35’. The aim of the legislation is to eliminate the avoidance of PAYE and NI through the use of intermediaries, such as service companies, in circumstances where an individual contractor 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. Full details of the legislation and useful guidance can be found on the HM Revenue & Customs website.
Working with IR35
The legislation does allows individuals who are genuinely in business on their own account, to supply their services through a limited company and operate outside of the MSC rules. In doing so freelance contractors are able to benefit from favourable tax arrangements.
However, those favourable arrangements are negated if the IR35 rules are deemed to apply. Despite the introduction of the MSC legislation, HMRC remains committed to reviewing and investigating cases under IR35 and the latter part of 2007 saw a series of Special Commissioners’ rulings that the individuals were working as ‘disguised employees’ resulting in significant arrears of tax and NI.
What is important in judging whether you are outside IR35?
The recent cases highlight that whilst it is important that the contractual terms between contractor/agency and agency/client recognise that Limited Company contractors operate on a freelance basis, it is not possible to solely rely on these contracts to demonstrate you are outside of IR35. The actual working practices between the contractor and client for your assignment must be taken in to account.
For a freelance contractor not to be ‘deemed employed’ for tax purposes, it is necessary to address the key status indicators used by HMRC to determine that you are not employed. These include:
Personal Service
In general terms, your Limited Company needs to be able to send someone else to do perform your assignment if you are unavailable. A ‘right of substitution’ is therefore important and needs to recognise that the consent of a client is required (but such consent should only be withheld on reasonable grounds – such as the substitute does not have similar experience or qualifications).
Mutuality of Obligation
Your Limited Company should not be obliged to keep on doing the assignment for the client and the client should not be obliged to keep on offering you the work. Generally, both you and the client need to be able to terminate the engagement relatively easily.
Direction and Control
As a freelance contractor, you must be allowed to use your professional judgment in deciding how to deliver the services, and whilst the client will identify the required output, they should not instruct you on how to go about doing the work. You should also be clearly identified as a contractor and not be seen as part and parcel of the organisation.
Financial risk
As a freelance contractor, you should normally have a greater financial risk than someone who is an employee of the client. This might be through fixed fee income or from the risk that you may not be paid for the work done or that payment might be delayed. This is one of the reasons why it would be appropriate for your Limited Company and yourself to ‘Opt-out’ of the Conduct of Employment Agencies and Employment Businesses Regulations 2003 prior to the commencement of an assignment.
To get an understanding of the implications of IR35, the Professional Contractors Group provides useful help and advice for individuals who chose to work for themselves.
I need more help and advice?
NES Group is keen to ensure its contractors obtain good professional advice in respect of their assignments and IR35. NES Group has agreed a discounted rate for an IR35 Review by an independent Tax Adviser - John Hill and Associates. For more details click HERE.
Disclaimer: NES Group provides taxation and legislative information for general guidance only. You should neither act, nor refrain from acting, on the basis of any such information. You should take appropriate professional advice based on your particular circumstances. The application of laws and regulations will vary depending on particular circumstances, and laws and regulations change on a regular basis.
