Introduction to IR35 and tax
Who's affected?
Businesses primarily affected are personal service companies and family partnerships in the service sector.
Where an employee is provided by any company for services to a client on terms which would normally constitute an employment with that client, this is called a 'Relevant engagement' and new special rules apply.
The main change
When these businesses receive income from 'Relevant engagements', they will be forced to treat it as salary payable to the person carrying out the work. It will no longer be possible to distribute these company funds as dividends.
How is it worked out?
The tax office have prepared a computation taking income from 'Relevant engagements', allowing a small list of deductions plus 5% of gross income, to arrive at the 'Deemed salary' which will be taxed and subject to NIC as if it has been paid as a salary. The net deemed salary can be drawn by the employee.
Effect on record-keeping?
Where a company has several sources of income, consisting of both relevant engagement work and other work, or relevant engagement work relating to a number of employees, it will be necessary to separate the income streams in order to prepare the calculations.
How to minimise its impact
It is important to examine the nature of each engagement and the way expenses are incurred to minimise the impact of the rules.
Tests of employment
To establish how the rules are likely to affect each individual contractor, it's necessary to consider the tests of employment. This brings us back to the factors which indicate whether the work would be defined as employment or self employment. Reliance on a contract for services should be used with caution, even if it has received tax office approval.
Click here to consult the list of indicators of self-employment
Corporation Tax
Full records of expenditure should be kept in the usual way as IR35 has no effect on the corporation tax rules, and the company will still be taxed on the net profit or claim for the net loss in an accounting period.
What's not included in IR35?
- Actual or implied contract meets test of self employment (IR35 Regime);
- Goods or end product included in the contract;
- Although for a UK resident IR35 will apply to any world wide income, for a non UK resident IR35 will hardly ever apply.
What can I do?
- Engage for a project not a role, eg:
- "produce computer programme" not "IT contractor"
- do a specific task not make your services available
- Ensure that no right of control is exercised by the customer over the manner in which the work is performed:
- What is done - Customer has no right to move the worker to different area of work
- Where it is done - Customer has no right to dictate that work is carried out on his premises
- When it is done - No requirement to work particular hours
- How it is done - Customer cannot prescribe the way work is done
- Have no restrictions on accepting other work. Seek other work, especially when contract comes up for renewal;
- Have a business-like approach to obtaining and organising contracts and to running the business. This will include incurring expenditure not normally associated with employment; eg. letterheads, trade directory entries, advertising for work, legal advice about contracts, professional indemnity insurance, providing premises, providing equipment, issuing invoices for work done, preparing accounts, having a business bank account, registering for VAT, business administration costs.
We can help
If you have not yet had the opportunity to consult us on your business' approach to the new regime, do contact us to arrange an appointment.
Contact us
This tip sheet is provided to you completely free of charge but if you would like further information please call us now to arrange a meeting. Print this voucher for a free initial meeting.
