Off-payroll - Intermediaries legislation (known as IR35)
If your company is classed as a personal service company, many of the tax-planning opportunities available to other company owners may not be available, for example the ability to take dividends that are free from national insurance.
Personal service companies have to operate the ‘IR35’ regime which means the company may be forced to calculate a notional salary for the director/shareholder. This deemed income will be subject to PAYE and national insurance and possibly penalties for late payment.
Essentially, HMRC may ignore the company that you set up and treat most of the company’s income as employment income.
What’s a personal service company? And which Companies Are Affected by IR35?
A personal service company is, generally speaking, a firm that receives all or most of its income from services provided by the director/shareholder.
Furthermore, where the work will be carried out for just one client, often for a long period of time, and the client will probably only want the personal services of the company owner IR 35 is commonly applied.
Essentially HMRC is looking for cases of ‘disguised employment’. In other words, ignoring the fact that there is an intermediary company, the relationship is more like an employer/employee relationship rather than the kind of relationship that exists between independent self-employed business owners and their clients.
Where such ‘disguised employment’ exists, the company must apply the IR35 regime to the payments received from that client – effectively treating most of those payments as if they were salary paid to the director/shareholder.
A typical situation that might be caught under the IR35 rules is where the individual resigns or is made redundant as an employee and then goes back to the same job but working through a company.
However, IR35 is subjective and assessed on a case by case basis using case law to determine the outcome.
If you have a personal service company that is deemed to be under IR35 then your company is liable to pay any amounts due to HMRC.
Self assessment - sole traders
IR35 does not apply to sole traders who contract as individuals directly with their client (with no intermediary).
Below is an extract of advice given by HMRC on its website:
HM Revenue and Customs (HMRC) may regard someone as self-employed for tax purposes even if they have a different status in employment law.
Employers should check if a worker is self-employed in:
- tax law - whether they’re exempt from PAYE
- employment law - whether they have an employee’s rights
Individuals and their employers may have to pay unpaid tax and penalties, or lose entitlement to benefits, if their employment status is wrong.
Checking if they’re exempt from PAYE
Someone is probably self-employed and shouldn’t be paid through PAYE if most of the following are true:
- they’re in business for themselves, are responsible for the success or failure of their business and can make a loss or a profit
- they can decide what work they do and when, where or how to do it
- they can hire someone else to do the work
- they’re responsible for fixing any unsatisfactory work in their own time
- their employer agrees a fixed price for their work - it doesn’t depend on how long the job takes to finish
- they use their own money to buy business assets, cover running costs, and provide tools and equipment for their work
- they can work for more than one client
Checking their employment rights
Someone is probably self-employed and doesn’t have the rights of an employee if they’re exempt from PAYE and most of the following are also true:
they put in bids or give quotes to get work
- they’re not under direct supervision when working
- they submit invoices for the work they’ve done
- they’re responsible for paying their own National Insurance and tax
- they don’t get holiday or sick pay when they’re not working
- they operate under a contract (sometimes known as a ‘contract for services’ or ‘consultancy agreement’) that uses terms like ‘self-employed’, ‘consultant’ or an ‘independent contractor’
If HMRC review your case and conclude that you are not self-employed, that you should have been paid through payroll and have been given employment rights this can be very costly for your client. This is often sited as a reason why some clients insist that you set up a personal service company to act as an intermediary.
The above advice is only general, as each situation needs to be considered carefully to determine how the IR35 rules might apply to you. If you need further advice in this area please contact us