This is the second part of the two-part series of looking at IR35 and personal service companies. Carrying on from the last blog, if you are a limited company with just yourself as the director running the company and have only one customer, you are likely to fall into the deemed payment category. This blog will go through some examples and look at other company types that can be affected by IR35.
IR35 Employment status tool
The following examples go through the HMRC checklist (that was in the last blog) to show how they may fall in or out of the IR35 rules. This is not a definitive test, and each case will be treated differently, but these examples will give you an idea of what to look for.
There is more information on HMRC’s website where you can take the employment status test to see whether your contract is caught by IR35 or not. The link to the website is here: https://www.gov.uk/guidance/check-employment-status-for-tax?inf_contact_key=3cb25e973513ba2339b563653db25d8eeed953eb18c81e71e872b8d2596014a5
Example 1 – Outside IR35
Miss A is on a fixed price basis and can send a substitute.
Control: Miss A has control over the work she does
Substitution: Miss A can send a substitute even though she has not exercised this clause.
Financial risk: Miss A’s fixed price invoicing means that she takes the risk.
These factors demonstrate that Miss A is not caught under the IR35 rules.
Example 2 – Inside IR35
Mr B is a highly skilled knowledge worker who works at the client’s site full time and uses the equipment provided for him.
Equipment: The client provides the equipment
Control: Mr B has to request time off, and therefore the client has control over the time and hours he works
Mutuality of Obligation: The client expects the work to be done and what work is to be done is decided for him.
In this case, all of the company’s income is caught by IR35 rules. A deemed payment will need to be calculated and the tax and NI due will need to be paid by the 19th April after the tax year.
Example 3 – Borderline
Mrs C has worked for the same company for eight years which can potentially put her inside IR35.
Substitution: Mrs. C has a substitution clause, but it is unsure if the client would accept a substitute.
Control: The client tells Mrs C what to do but not when or where she has to do it.
Financial risk: She receives no employment benefits and invoices the client for her work.
Equipment: She uses the client’s equipment which can put her inside IR35
However, one big factor that puts her outside the IR35 is that Mrs C is contractually obliged to correct any mistakes at her costs.
Payments due on the 19th April
If you fall into the deemed payments rules, then by the 5th April, the deemed payment is treated as having been paid on this date. If that is the case then:
- All tax and NIC have to be paid by the 19th April
- The final RTI submission has to be submitted by the 19th April
- If you are not able to accurately calculate the deemed payment, then any adjustments need to be reported by the following 31st January online through the Earlier Year Update.
- Interest will be due on any underpayment of tax and NI
Most partnerships are not caught by the IR35 rules unless the following applies:
- The individual is entitled to 60% or more of the profits
- All or most of the partnership income comes from a single contract
- The partners profit share is based on the amount of income from an employment contract
If any of these rules apply then the ‘employment contract’ would be treated as a deemed payment on that individual with employment tax due on the 19th April. This part of the income would not then be treated as partnership profit.
Managed Services Company
A managed service company (MSC ) is a company where a group of contractors were placed into one company or Umbrella and paid through the company as shareholders of the company and therefore receive a dividend and without having the responsibility of having a company to look after. The government has introduced new legislation to these companies too to avoid using them for tax advantages. It has been hard to enforce these rules on MSC as they often get wound up before any tax payments can be enforced. It is also quite time-consuming to check through these MSC companies. The only type of MSC that are allowed now are ones that pay through a PAYE scheme.
The IR35 is one tool that is used to cope with the evolving workforce in the UK. There are more people who are self-employed, and this is having an impact on the income tax the government receives.
Please contact Southside Accountants Wimbledon for your tax and accountancy needs.
Written by Nisha Patel – Chartered Certified Accountant and a Tax Expert.