We summarise what situations are caught by the special rules that apply to some personal service companies and the implications of the rules. At The A9 Partnership Ltd, we can help check whether the regime may apply to your company if you live or work in the Broxburn area.
The off-payroll working rules are designed to prevent the avoidance of tax and national insurance contributions (NICs) through the use of personal service companies and partnerships.
The rules do not stop individuals selling their services through either their own personal companies or a partnership. However, they do seek to remove any possible tax advantages from doing so where the worker would otherwise be an employee of the client.
The application of the rules differs depending on the client to whom the services are provided; whether the client is a public sector body, a large or medium private sector business or a small private sector business.
The tax advantages mainly arise by extracting the net taxable profits of the company by way of dividend. This avoids any national insurance contributions (NICs) which would generally have been due if that profit had been extracted by way of remuneration or bonus. In addition, dividend tax rates are lower than those applicable to salary income.
The intention of the rules is to tax most of the income received from the client as if it were the salary of the person doing the work.
The rules apply if, had the individual sold their services directly rather than through a company (or partnership), they would have been classed (by HMRC) as employed rather than self-employed.
For example, an individual operating through a personal service company but with only one customer for whom they effectively work full-time is likely to be caught by the rules. On the other hand, an individual providing similar services to many customers is far less likely to be affected.
One of the major issues under the rules is to establish whether particular relationships or contracts are caught. This is because the dividing line between employment and self-employment has always been a fine one.
All of the factors will be considered, but overall it is the intention and reality of the relationship that matters.
The table below sets out the factors which are relevant to the decision.
HMRC will consider the following to decide whether a contract is caught under the rules:
HMRC has provided a digital tool to help identify the employment status of a worker.
The main points to consider if you are caught by the legislation are:
If a company has employees who have 5% or less of the shares in their employer company, the rules will generally not be applied to the income that those employees generate for the company.
Note however that in establishing whether the 5% test is met, any shares held by ‘associates’ must be included.
There are different rules which apply depending on the client to whom the services are being provided.
Where the client is a small, private sector body then responsibility for determining the status of the worker lies with the personal service company.
Where the client is a public sector organisation or a medium or large-sized private business, broadly that entity will have responsibility for determining the status of the worker and communicating that via the issue of a status determination statement.
The legislation uses an existing statutory definition within the Companies Act of a 'small company' to exempt small businesses from the new rules. A small company is one which meets two of these criteria:
If the business receiving the work of the individual is not a company, it is only the turnover test that will apply.
These rules are sometimes referred to as the IR35 rules.
The personal service company operates PAYE & NICs on actual payments of salary to the individual during the year in the normal way.
If, at the end of the tax year - ie 5 April, the individual’s salary from the company, including benefits in kind, amounts to less than the company’s income from all of the contracts to which the rules apply, then the difference (net of allowable expenses) is deemed to have been paid to the individual as salary on 5 April and PAYE/NICs are due.
Allowable expenses include:
Where salary is deemed in this way:
Where the legislation applies, the public sector engager or fee-payer is treated as an employer for the purposes of tax and Class 1 NICs (including employer NICs) and the amount paid to the worker’s intermediary will be deemed to be a payment of employment income to that worker.
The 5% allowance used by the worker’s intermediary for certain business expenses is not available for contracts with the public sector.
Income received by the personal service company which has been taxed as employment income under these rules is not chargeable to corporation tax, nor is there additional income tax to pay on extraction of the funds.
Where individuals sell their services through a partnership, the rules are applied to any income arising which would have been taxed as employment income if the partnership had not existed.
Many partnerships are not caught by the rules even if one or more of the partners performs work for a client which may have the qualities of an employment contract.
The rules will only apply to partnerships where:
Where a personal service company or partnership fails to deduct and account for PAYE/NICs due under the rules, the normal penalty provisions apply.
If the company or partnership fails to pay, it will be possible for the tax and NICs due to be collected from the individual as happens in certain circumstances under existing PAYE and NIC legislation.
MSCs had attempted to avoid the IR35 rules. The types of MSCs vary but are often referred to as ‘composite companies’ or ‘managed PSCs’. Broadly, the main difference is that an MSC provider is involved with the worker’s company. For example where the provider benefits financially from providing the services of the worker or influences/controls the provision of those services or the way payments are made to the individual. Legislation has been introduced to ensure that workers providing services through an MSC are subject to similar rules to those for PSCs above.
We can advise as to the best course of action in your own particular circumstances in the Broxburn area.
If IR35 does apply to you we can help with the necessary record keeping and calculations so please do contact us at The A9 Partnership Ltd.