IR 35

One Man Service Companies

In the past many contractors in the service industry, have traded through "one man companies". The have invoiced their "employer" for the gross sum of their contract, the company has paid this sum out in the form of dividends without the deduction of PAYE or National Insurance. The worker has avoided the application of the rules affecting those in salaried employment.

In 1999, the UK government announced new rules to counter "tax avoidance" by Independent Contractors. A situation mentioned in the official announcement of the policy is where "someone leave[s] work as an employee on a Friday, only to return the following Monday to do exactly the same job as an indirectly engaged ‘consultant’ paying substantially reduced tax and national insurance." The plan was implemented in the April 2000 budget.

The key issue for an Independent consultant is the ability to show that his/her status is one of self-employment. The divide between self employed and employed has not been altered and this will be summarised below. Those who can show that they are self employed will not be affected by IR35 and may continue to avoid PAYE and National Insurance.

The IRD taketh away a lot and IRD might giveth a bit back

There may be a theoretical improvement of the position of some employed workers as against the self employed with introduction of the All Employee Share Scheme (discussed below) also introduced in April 2000 which allows both small and large businesses greater flexibility to reward employees with the transfer of value in the form of shares and share options in the employer business in a tax and national insurance advantageous manner. The IRD view contractors as not being employees (even though they will be bound to be taxed on their income from their service companies) and are unable to enjoy All Employee Share Scheme benefits.

IR35 Issues requiring consideration by the consultant include the following:-

• Tests of Employment as against Self Employed
• Expense Allowances
• Deemed Salary calculation and its impact on tax payment
• Corporation tax VAT and company law aspects

Finance Bill 2007

The Finance Bill 2007 will introduce a statutory definition of a 'managed service company' (MSC). Income received by individuals providing their services through MSCs will be deemed to be employment income where it is not already treated as such. From 6 April 2007, MSCs will have to operate and account for PAYE and Class 1 NICs on all payments received by individuals providing their services through such companies

© Michael Reason LLM 2000-2007