Individuals operating through an intermediary company; be it a Personal Service Company (PSC) or a limited company, have enjoyed multitudinous advantages by placing their income in a lower tax band or/and avoiding National Insurance Contributions (NIC). Individual workers received salaries from clients directly in the name of the company and the company revenue was used to write off expenses, distribute dividends and reduce their tax liability. With the implementation of IR35 in 2000, the government introduced new rules for tax treatment for intermediary companies, in light of the growing concerns of these companies using various means and measures to avoid tax and NIC. Essentially, IR35 aims to prevent incidences of tax avoidance and National Insurance liability by contractors who provide their services to a client and receive salaries and emoluments through intermediary companies.
Employment Status-Self Employed or not
The HMRC lays down the guidelines to classify individuals as “employed” or “self-employed” and thereby removing the ambiguities of their employment status. The Employment Status Indicator (ESI) tool enables individuals to check their employment status for the purpose of tax, NIC or VAT, and thereby minimizes the burden on the end user by simplifying the employment rules.
Who does IRS35 apply to?
- Wherein the services are provided for the end client by engaging the services of an intermediary company
- If you personally render your services to the end client and have rights to receive payment that is not employment income
- Wherein the nature of the employment is such that if you had provided your services to the end client directly, your income would be regarded as income for the purpose of taxation and NIC, and as employed earner’s employment by your employer.
Role of a PSC/intermediary company under IR35
Unless otherwise mentioned, it is always an intermediary company that is responsible to ensure that the IR35 compliances are in place. The end client or a recruitment agency cannot be made liable for the commercial arrangement between themselves and the contractor. Hence, if IR35 applies to a contract, one has to take following measures such as:
- Calculation of deemed payment after tax liability, payment of NIC and all due deductions
- Reaffirm IR35 position in the contract
- Take into consideration the deemed payment whilst paying for Corporation Tax or whilst making distributions and Construction Industry Scheme.
Impact of IR35 on individual Contractors
While it is the contractors and not the clients who are liable to pay taxes, N.I. and deductions, individuals who provide services to end clients through a PSC have to pay the same amount of taxes as their counterparts who are under direct employment. The net income is considered as “deemed payment” following all the deductions and benefits. Expenses under S198 may be claimed apart from the intermediary expenses of 5% of the contractor’s earnings. HMRC also allows certain expenses that can be claimed by a contractor towards administration costs, pension payments, business travel, subsistence, computer and network costs, training etc.
Essentially, IR35 rules prevent the intermediary companies from retaining profits by increasing taxes and making N.I. contributions mandatory. Essentially, the IR35 affects individual contractors who do not meet the criteria of “self-employed” as specified under the HMRC rules. While it is vital for a contractor to determine their position under HMRC compliances, it is important to ensure that you sign an IR35 friendly contract, wherein the terms are in line with the working practices.