Are you a contractor working via a limited company? You may or may not be aware of the recent changes to the way in which such companies who are engaged to provide services to public sector bodies are taxed.
The changes apply to intermediaries’ legislation, commonly known as IR35. This sets out the rules that affect tax and national insurance when you are contracted to work through an intermediary. You may need to follow the IR35 legislation if you are a subcontractor using one of the following to contract to an end user.
- Your own limited company
- A service or personal service company
- A partnership
Under current rules, as a contractor you should consider what the underlying relationship (employment status) is between you and your client, the end user. If the underlying relationship without the intermediary company would be one of self-employment, IR35 would not apply. However, if the underlying relationship would have been one of employment, IR35 would apply and you would be required to apply tax and national insurance charges to the income received in the company from that particular contract.
The changes, will take effect from April and will mean that the decision to apply IR35 will rest with the public sector end user, rather than the subcontractor. If the public sector body considers that IR35 applies to the contract, they will be required to deduct tax and national insurance from all payments made, with no allowance being given for expenses. Any income subject to tax or national insurance in this way will not subsequently be taxed through the company tax calculation.
If the end user determines that IR35 does not apply, payment can be made without deduction of tax or national insurance. Tax will continue to be calculated through the company accounts after deducting all relevant expenses. HMRC are to provide an employment status indicator tool to assist end users in determining whether IR35 will apply, although this has yet to be made available.
"The changes, will take effect from April and will mean that the decision to apply IR35 will rest with the public sector end user, rather than the subcontractor."
Gary Loughlin, Tax Manager
In order to continue to receive payment without tax or national insurance deductions, it is important to ensure that your working arrangements cannot be considered to be employment. This would require your contract to include the following –
- Right to use a substitute worker.
- A requirement that any remedial work will be carried out at your own expense.
- Confirmation that the end user is under no obligation to offer work and also that you are under no obligation to accept work.
If the above conditions are included within your contract and reflected within your working arrangements, the end user should not deem you to fall within IR35 and should continue to make payment to you without deduction of tax.
As the changes have been confirmed in the recent budget, we recommend taking the opportunity now to review any current contracts with public sector bodies ensuring they meet the above criteria.
If you would like any further help, guidance or assistance, please do not hesitate to contact us. Haines Watts Liverpool Limited on 0151 227 3463 or Liverpool@hwca.com.
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