HMRC recognises that self-employed status is beneficial for both employers and contractors, including lower levels of Employer National Insurance Contributions and the ability to claim a number of tax deductible expenses not ordinarily available to an employee.
In light of this, HMRC has sought to close down a well-known loop hole whereby individuals choose to offer their services to an employer (“the Client”) through a Limited Company (“Personal Service Company”) where, if it was not for the Company, the individual would be deemed to be employed by the Client.
An arrangement is likely to be caught by IR35 if, amongst other things, an individual provides personal service to the Client (or is obliged to do so); those services are provided under arrangements involving a Personal Service Company; and the circumstances of the arrangement are such that if the arrangements had been made directly between the Client and the individual, the individual would have been held to be an employee.
A number of important changes were also outlined in the July Budget, aimed at further removing the advantages of such relationships. In summary, the Government intends to implement the following provisions:
From 2016-2017, the £2,000 National Insurance Contribution ‘Employment Allowance’ will not apply to companies whose sole employee is also the shareholder/director of the Company
With effect from April 2016, tax credits on dividends will cease to be paid and dividends will be taxable at the rates of 7.5%, 32.5% and 38.1% for basic rate, higher rate and additional rate taxpayers respectively. The first £5,000 of dividends will be exempt from taxation.
The Company will be liable to deduct tax and National Insurance Contributions from travel expenses claimed for travel to and from any assignment where the individual is subject to direction, supervision or control by the Client
It is also widely expected that HMRC will carry out further consultations later in the year regarding potential further reforms of the IR35 legislation currently in place.
As such, it is more prudent than ever to ensure that any agreements in place contain the requisite precautions to avoid being caught by IR35 and incurring hefty interest and fines, in addition to the back payment of tax and NI. Generally, the agreement between the parties will be the first place HMRC look to establish whether the arrangement leans towards an employment relationship rather than one of self-employment – it is the substance of the contract and the arrangements in practice which are of importance, not just whether the contract declares the individual to be self-employed.
At Attwells Solicitors, we are able to provide expert advice and documentation to contractors so as to properly reflect their self-employed status, on a fixed fee basis. We can review the agreements already in place and provide you with an assessment of such documents as well as suggestions on any improvements which could be made. We are experienced in drafting new agreements for future use and work alongside local accountancy firm ‘An Accounting Gem Ltd’ to provide a full service for your business in respect of your legal and accountancy needs.