HMRC are again starting to focus their attention on IR35, so watch out Contractors! Over the last 20 years there has been a significant increase in the number of freelance contractors. Depending on the sector different terminology is used. The writer himself spent a significant period of his career working as an ‘interim’ Accountant. In other sectors a more common term is a ‘freelancer’, or even just a mere ‘contractor’. There are some business sectors where this type of service has become the norm, such as the IT sector and in many areas of the media. In fact it has also become popular in the public sector and quasi-government organisations, such as the BBC. I will say no more, but you can have your own views!
Regardless of the description these are people that generally provide a service through an intermediary to the final client. The intermediary is normally an employment agency and the provider of the service invoices for their services through a limited company, or otherwise known as a personal service company. The benefit for the service provider is that they can optimise their personal tax situation by reducing the amount of income that is taxed and charged to national insurance (NIC) through the PAYE system. It also allows greater offsetting of business expenses than allowed for normal employees and perhaps the greater benefit is being able to take profits from the limited company as dividends.
Back in 1998 Chancellor Gordon Brown attempted to plug the hole in the tax system. Thus, the first solution set out in the 1999 Budget press release number IR35, was to make the client (final customer of the contractor), shoulder the burden of the new tax regime. If the worker who provided services through an intermediary, operated under the control of the client (like an employee), the client would have to apply PAYE and NIC to amounts invoiced by the intermediary.
By September 1999 the proposals had changed significantly, such that the intermediary would be responsible for the compliance with what become known as IR35. Also the control test was replaced with an employed or self-employed test.
HMRC have now issued a consultation paper which takes a similar position to the original IR35 press release. Please refer the consultation paper in issued on 26 May 2016 The current consultation paper suggests the client, or third party agency if there is one, will have to test whether the worker falls within IR35.
A new online IR35 interactive tool will allow the client or agency to perform this test by answering just a few questions. The result from this online tool will be provided in real-time and give the definitive HMRC view on the position.
When the contract falls within IR35, the client, or agency in the chain who is closest to the personal service company, must apply PAYE and NIC to the net amount invoiced (less VAT and 5% expenses). This PAYE will be reported through RTI, using the worker’s NI number.
As stated above there has been a significant growth in personal service contracts in the public sector and these changes will only apply to contracts performed for public sector bodies from April 2017 onwards. The definition of a public sector body is lifted from the Freedom of Information Act 2000.
With regards to the private sector the basic IR35 rules remain unchanged. If a service provder has been caught by IR35 than the service company must distribute 85% of the firm’s income through the PAYE system. But HMRC is still not applying the IR35 rules strictly and many sectors still seem to avoid it. Again I will not comment any further!
To conclude this is still an area of great inconsistency and many personal service companies still avoid the IR35 requirements, even though they often only work for a single customer and have been in the same arrangement for many years. The current focus is on the public sector and the writer knows from his own experience that this is an area often picked up in freedom of information requests, especially in the NHS.
For an update on the IR35 situation please read the attached commentary issued by Francis Clark, Tax Consultancy
Kaye Adams IR35 April 2019 handout
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