IR35 Personal Service Companies

Anyone that provides their services through a Limited Company needs to consider the legislation known as IR35 which was brought in by the government to prevent people paying substantially less tax and national insurance by operating through an intermediary such as a Limited Company instead of being employed directly by the client.

Separate rules were bought in in 2007 to counter avoidence through the use of ‘Managed Service Companies’

The rules are lengthy and I give here a brief overview which is not comprehensive. This article is for the information of the reader only and does not constitute advice (see below).

Personal Service Company

There is no clear legal definition for this but most commonly it is where a sole director, shareholder provides his services to clients.

The legislation ensures that, if the relationship between the worker and the client would have been one of employment had it not been for an intermediary (his company) the worker pays broadly the same tax and NIC that he would have paid if he had been an employee of the client.

The important point here is ‘if the relationship between the worker and the client would have been one of employment’

This determination of status (employed or not) has already been the subject of many HMRC Commissioner appeals and legal cases but no definitive clear guidance has emerged.

However some of the important factors to consider are:

Each contract has to be looked at separately

Careful drafting of the contract is essential (for example the need for a substitution clause)

Where is the contract performed at the client’s premises or at yours

Control and supervision over the work

Are you ‘part and parcel’ of your client’s organisation

Do you follow the client’s normal terms of employment such as office hours etc

Do you carry PI insurance

Do you advertise

Are you at financial risk

Whose equipment do you use in a particular contract

There is a dedicated IR35 helpline which is staffed by people who are independant of HMRC compliance staff.

There is also an IR35 Forum which has devised 12 tests for determining whether there is a low, medium or high risk of a particular contract falling within IR35.

I attach HMRC’s guidence here:

https://www.hmrc.gov.uk/ir35/

Managed Service Companies:

Managed Service Companies or sometimes known as Umbrella Companies are similar to Personal Service Companies but are usually provided by an outside business that controls the administration and financial management.

The legislation requires that all payments for services provided through such companies are treated as employment income.

I include the HMRC guidence on this:

https://www.hmrc.gov.uk/employment-status/details.htm

The rules around Personal Service and Managed Service Companies are complex and in many cases not clear therefore each individual case and contract needs to be considered.

If you need further help and advice regarding IR35 or Managed Service Companies then please contact me on [email protected] or visit my website pmarks.co.uk

Disclaimer:

Paul Marks & Co Chartered Accountants is the trading name of Paul Marks Ltd a Limited Company registered in England and Wales (registered number 4487645). This article is designed for the information of readers only and readers should not act on any of the information contained in this article without seeking professional advice. Nothing in this article constitutes advice, nor does the transmission, downloading or sending of any information or the Material create any contractual relationship. Links to third party websites are provided as a convenience to the reader, Paul Marks Ltd does not control and is not responsible for any of those websites or their content. Paul Marks Ltd accepts no liability or responsibility whatsoever for any loss or damage suffered by any user of the information contained on or accessed through this article or the Material downloaded.