HMRC and IR35

posted on March 27, 2013in the Blog Category

HMRC and IR35

Since IR35 was first introduced in 1999 it has singularly failed to achieve its aim of increasing tax take from contractors who use Personal Service Companies (PSC) to contract through, either with end users of their services or via agencies. IR35 was intended to “see through” a situation where a PSC was inserted between a contractor and an end user of the contractors’ services with the main aim being to enable the contractor to extract income from the PSC by way of dividend. Typically, extraction of income by way of small salary and the balance as dividends has resulted in savings as follows compared to the alternative of extraction by way of PAYE salary:- Income                                               Saving £60,000pa                                           £8,979 £80,000pa                                           £10,786 £100,000pa                                         £12,592 £150,000pa                                         £17,030 Given the above savings, IR35 required contractors to assess the status of their relationship with the end user of their services and, if the relationship was really one of “master and servant” rather than being truly one of “self-employment”, IR35 forced the contractor to extract all the funds from their PSC’s by way of PAYE and thus lose the savings above. Not a happy outcome! However, many contractors are thought to have largely ignored IR35 and chosen to continue extracting income by way of dividends even in circumstances where their “status” is, at best, dubious! This further frustrated HMRC as they have, until now, been unable to find a way to effectively clamp down on what they see as “rogue contractors”. That, it appears, is all about to change! HMRC have now established and resourced 3 specialist units across the UK and these units have already significantly increased investigation activity in the IR35 arena and will continue to do so. At the same time HMRC have also introduced Business Entity Tests (BET’s) which enable contractors to run through the tests and establish if their circumstances fall into either low, medium or high risk as far as IR35 is concerned although please note that a high risk rating is not necessarily a guarantee that a business is caught by IR35. HMRC have produced a very helpful guide to the tests that can be accessed at http://www.hmrc.gov.uk/ir35/guidance.pdf. This document sets out the 12 tests and the points awarded/deducted depending upon the answers to the questions posed within the tests, the combined total points score then being the indicator of low, medium or high risk. There are also some examples within the document as well as guidance on the impact of falling into one of the risk categories. Please remember that the tests apply to each engagement that your PSC undertakes as the circumstances could be such that one engagement is caught by IR35 whilst another isn’t. Please note that we have solutions available to assist clients who may be caught by IR35 and at the same time avoid the use of PSC’s. These solutions may also produce sizeable tax savings! If you have any queries please do not hesitate to contact us. Tony Collier, Managing Partner

Written By: MBL

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