Personal Service Companies – IR35
Changes in the employment market have led to a rise in self-employment, with the tax efficiencies of a limited company attracting many to incorporate their business without taking professional advice; such companies could be at risk of challenge by HMRC
Where a company is set up to provide personal services to one client or has an employment-like relationship with a client, HMRC could challenge the arrangement and unwind the tax advantages gained through corporate status. Written contracts alone aren’t enough to withstand challenge – so is your business properly protected from the personal service company legislation?
The personal service company legislation, or IR35, was introduced to tackle those employees seeking to gain an unfair tax advantage by providing their services through a limited company. When applicable, it works by taxing the income from relevant engagements as if it were employment income, thereby reversing the benefits of incorporation.
Although some businesses offer what they claim to be ‘IR35-proof’ contracts for you to use with your clients, the reality is that no such contract exists. The rules have moved on since they were first introduced and written contracts alone won’t protect an engagement from challenge; regardless of what a contract may say, HMRC judges an engagement based on actual practices throughout its term. However, that doesn’t mean that work can’t be done in advance of agreeing a contract that significantly reduces the risk of a contract being caught by IR35.
The legislation and supporting guidance sets out the factors of an engagement that suggest employment over self-employment, and understanding how these apply to your business can dramatically reduce your risk. At Walpole Dunn, we have the expertise and experience in dealing with IR35 challenges to help assess your current and existing contracts and can provide the proactive advice to help reduce your exposure to challenge by HMRC.
To date, IR35 has been charged on a self-assessment basis, i.e. you tell HMRC if you think it applies to one or more of your company’s engagements and apply the tax accordingly. However, with effect from April 2017, for any engagements with the public sector (e.g. NHS) the contractor will become responsible for assessing the charge to tax. This will mean that existing companies could see their income from such contracts significantly reduced by tax and national insurance deductions made at source.
For the foreseeable future, the obligation to assess engagements within the private sector will remain with the service provider.