Tag: Deemed Payment

Why retainers are bad for consultants

Scaring amounts

A retainer fee is a fixed amount of money that a client agrees to pay, in advance, to secure the services of a consultant or freelancer. The fee is typically not associated with the success of a project or based on achieving particular results. A retainer is often paid in a single, lump sum, or on an ongoing basis (typically monthly or quarterly). [About.com – Consulting/Freelance]

The problem is that retainers create mutuality of obligation (MOO).

The significance of mutuality of obligation is that it determines whether there is a contract in existence at all. Without mutuality of obligation there can be no contract of any kind.

 

Only when the basic requirements for mutuality of obligation have been identified is it possible to then consider whether the contract is a contract of employment or a contract for Services (self-employment).

 

The basic requirements as to the mutual obligations necessary to determine whether there is a contract in existence at all are:

 

  • that the engager must be obliged to pay a wage or other remuneration, and
  • that the worker must be obliged to provide his or her own work or skill.

 

These basic requirements could be present in either a contract of service or a contract for services and, on their own, will not determine the nature of a contract.

According to HMRC, the irreducible minimum requirements for a contract of employment are:

  • the requisite mutuality of obligation present;
  • a sufficient degree of control being exercised on the part of the engager;
  • other provisions of the contract being consistent with a contract of employment

The very nature of a retainer fee arrangement attaches to it obligations, i.e. for the client to pay the freelancer an ongoing fee in return for the expectation by the client for the contractor to make themselves available, normally at short notice.

 

It’s almost impossible to argue that retainer fees would not fall within IR35 and be treated as Deemed Payments.

In order to stay outside of IR35 you will need to carefully consider the contract and identify employed status factors that will put you outside of IR35.

steve@bicknells.net

IR35 – How are deemed payments taxed?

And now round two of justify it

The Intermediaries legislation known as IR35 was introduced on 6th April 2000.

The aim of the legislation is to eliminate the avoidance of tax and National Insurance Contributions (NICs) through the use of intermediaries, such as Personal Service Companies or partnerships, in circumstances where an individual worker would otherwise –

  • For tax purposes, be regarded as an employee of the client; and
  • For NICs purposes, be regarded as employed in employed earner’s employment by the client.

Many Freelance Contractors have some assignments within IR35 and some outside, you can ask HMRC for their opinion.

If you would like HMRC’s opinion on a particular engagement you should send your contract(s) to:

IR35 Customer Service Unit
HMRC
Ground Floor North
Princess House
Cliftonville Road
Northampton
NN1 5AE

e-mail: IR35 Unit

Tel No: 0845 303 3535 (Opening hours 8.30am to 4.30pm, Monday to Friday. Closed weekends and bank holidays) Fax No: 0845 302 3535

If your contract is within IR35 its not the end of the world, the chances are that you will still pay less tax than a direct employee, to calculate the tax you have to work through 8 stages of calculation, here is a summary:

  1. How much were you paid? deduct 5% for business costs
  2. Add any other payments/non cash benefits
  3. Deduct business expenses – travel, meals, accommodation
  4. Deduct capital allowances relevant to the work done
  5. Deduct pension contributions made by your company
  6. Deduct any NIC paid by your company on your salary and benefits
  7. Deduct any salary or benefits already paid and taxed
  8. If the answer is zero or negative then there is no deemed payment, if the answer is positive you do have a deemed payment which will be taxable

HMRC have a spreadsheet you can download which has further details.

steve@bicknells.net