On the 25th November 2013, the House of Lords Select Committee on Personal Service Companies met with Rowena Fletcher (Deputy Director with special responsibility for the Employment Status Team) and Robin Wythes (Team Leader of the Employment Status Team).
HMRC estimate there are 200,000 Personal Service Companies in the UK compared to their estimate in 1999 of 90,000. Interestingly, HMRC admit to employing 8 Occupational Phychologists through Personal Service Companies. The risk to the Exchequer is valued at £475 million and despite the large increase in PSC’s this estimate hasn’t changed since the introduction of IR35 in 1999.
In 2012-13 opened 256 enquiries into cases believed to be high risk and the tax year 2013-14 112 cases were opened in the first 6 months. In 2011-12 only 59 cases were opened.
Currently it is taking 28 weeks per enquiry which is faster than in previous years when it took between 110 and 140 weeks.
Currently only 5 cases under investigation which are expected to go to tribunal.
HMRC have 40 specialist staff working on IR35 Compliance, they had 1,200 calls in 2012-13 requesting advice and 80 detailed contract reviews were sought. If a contract review is carried out HMRC will issue a written certificate of opinion, the committee was assured that any contract review is totally confidential and not passed to the compliance team.
So are you happy that your PSC would be safe if HMRC carried out an enquiry?
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.
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
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:
How much were you paid? deduct 5% for business costs
Add any other payments/non cash benefits
Deduct business expenses – travel, meals, accommodation
Deduct capital allowances relevant to the work done
Deduct pension contributions made by your company
Deduct any NIC paid by your company on your salary and benefits
Deduct any salary or benefits already paid and taxed
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.
Dragonfly Consulting was a one man consultancy business, the one man being Mr John Bessell and his client was the AA (Automobile Association). It was landmark case in IR35 which was concluded in 2008 when HMRC won the case and claimed £99,000 in unpaid taxes and National Insurance.
First lets get Mike and Jeff to explain the basics of IR35 and employment status….
The key points being:
Personal Service and Substitution
Control
Mutual Obligation
So let’s pick out the key points in the Judgement:
1. Personal service / substitution.
Mr Bessell was named as the Consultant in two of the lower level agreements; however the fact that his name was omitted from the other lower level agreements did not undermine the requirement for his personal service. Henderson J found that Dragonfly was a one-man company, whose raison d’etre was to supply Mr Bessell’s services – therefore it was obvious that the intention of both parties was that it would be Mr Bessell who would provide the services.
The existence of a clause in the lower level agreement demonstrating that a substitute could only be used where the AA had expressly agreed it, and the oral evidence given by AA’s representatives regarding substitution, resulted in Henderson J concluding that the findings of fact were unassailable – amply justifying the Special Commissioners conclusion that each notional contract would have been for the services of Mr Bessell, and that a substitute could be used only if the AA had firstly given notice that a particular substitute was acceptable.
2. Control
Henderson J agreed with the Special Commissioner that a schedule supporting the first lower level agreement demonstrated that the consultant provided by Dragonfly was to act under the direct supervision and control of the AA.
3. Intention of the parties
Henderson J summarised the position, acknowledging that statements by the parties disavowing any intention to create a relationship of employment cannot prevail over the true legal effect of the agreement between them.
It was accepted that, in a borderline case, a statement of the parties intention may be taken into account and may help to tip the balance one way or the other, however in the majority of cases such statements will be of little, if any, assistance in characterising the relationship between the parties.
whether the engagement was one of service or for services – therefore the hypothetical contract would not have included a statement of the intention of the parties. Even if it was found such a clause were to be included in the hypothetical contract, this could not by itself result in reach the opposite conclusion about Mr Bessell’s notional status as an employee.
4. Worker status.
The appellant contended that the Special Commissioner failed to consider a third intermediate category – that of ‘worker’.
Henderson J confirmed the general law of employment does not recognise a third intermediate category between employment and self-employment; therefore there was no reason why the Special Commissioner should have considered any other category. In the context of IR35 the only distinction to be made is whether the notional contract is one of service or not – and the Special Commissioner clearly had that in mind.
Henderson J concluded by stating that for the reasons given in his judgement the conclusion that Mr Bessell fell on the employment side of the line is unassailable.
The lessons we can learn from this are:
The contractual paperwork must be correct at every stage
Paperwork on its own is not enough and commercial reality may take precedence
Demand from UK businesses for contract workers is continuing to rise in 2013, which could be good news for freelancers looking to get their foot in the door on a lucrative new project.
Despite the economic downturn, companies are still on the lookout for talented new employees, with demand surging after a slowdown in April. The findings pointed to more vacancies in the private sector than public sector roles.
So why would you want to be a Freelancer.
Pay rates – generally contractors are paid considerably more than employees
Flexibility – you are your won boss but the downside is that you have to find work
“Operating through a limited company as opposed to an employee brings significant financial benefits. By taking a small salary and high dividends you pay far less National Insurance, saving around 26%. There are obviously associated costs involved in running your own company, such as accountancy fees and insurance, but the overall ‘take home’ pay will still almost certainly exceed that of an employee.
But with the benefits there also comes risks. The IR35 legislation could affect any contractors working through limited companies and it’s vital that you take steps to ensure you are compliant. Contracting is also far less stable than permanent employment; you have been engaged as a temporary resource and your client can terminate the agreement at any stage. There is also the issue of illness; as a contractor you won’t receive any sick pay from your client, so any days not worked will hit your finances.”
But on a final note makesure you have the right equipment as explained in this sketch
If you provided your services through a service company (a company which provides your personal services to third parties), enter the total of the dividends (including the tax credit) and salary (before tax was taken off) you withdrew from the company in the tax year – read page TRG 21 of the guide £ • 0 0
This is what the guide says:
Service companies
Box 1 If you provided your services through a service company
Complete this box if you provided your services through a service company.
You provided your services through a service company if:
• you performed services (intellectual, manual or a mixture of both) for a client (or clients), and
• the services were provided under a contract between the client(s) and a company of which you were, at any time during the tax year, a shareholder, and
• the company’s income was, at any time during the tax year, derived wholly or mainly (that is, more than half of it) from services performed by the shareholders personally.
Do not complete this box if all the income you derived from the company
was employment income.
The majority of limited company contractors are, by definition, ‘personal service companies’ and therefore this box is of relevance.
The question however has no statutory backing and you cannot be penalised for failing or refusing to answer it but if contractors ignore the question when HMRC know full well that their company is a ‘service company’ then they may be drawing unnecessary attention to themselves.
The information to be entered is the total of the gross salary and dividends taken from the contractor’s company in the year ended 5th April 2012.
The point is not the whether you answer the question or not, its whether your company falls under IR35 that matters most.
IR35 came into existance in 1999, it was created to prevent workers previously employed from creating a limited company and then benefiting from lower taxes and national insurance through the use of dividends and expenses.
So you think you are self employed, does HMRC agree?
This Monday (18th July), the BBC’s CFO, Zarin Patel and its head of employment tax, David Smith, were quizzed about the use of personal service companies (PSC’s) within the corporation by the Commons Public Accounts Committee. It emerged that out of the Beeb’s 467 presenters, 148 broadcasters, i.e. nearly a third, were being paid via PSC’s. These 148 are not unique, however, as the BBC engages 25,000 freelancers.
This has been under discussion for a while and back in 2010 Accountingweb reported
Amongst those appearing as freelancers are: Jeremy Paxman (earning about £1m a year); Fiona Bruce (with annual earnings of around £500,000); and Fearne Cotton (who rakes in around £200,000 per annum)*.
However, not all presenters have fled the broadcaster’s payroll, with the likes of Huw Edwards (Ten O’Clock News presenter); Nick Robinson (political editor) and Evan Davis (presenter of the Today programme) still prepared to suffer good old fashioned PAYE.
It is hard to see on the face of it why a TV presenter would not be an employee based on:
Control
Personal Service/Subsititution
Mutuality of Obligation
Financial Risk
A BBC spokesman stated that the corporation provides HMRC with a detailed annual report of all payments made to PSC’s.
In response HMRC has now announced that it will increase its investigations into PSC’s. After admitting that HMRC had only enquired into 23 PSC’s, the department’s chief, Lin Homer, vowed to increase such investigations ‘ten-fold’ over the next year.
I was reading Tips & Advice Tax – Issue 17 and they highlight an unusual piece of new case law T Coffey/Dr Selvarajan and HMRC.
TC was a retired builder who was asked by S to manage and supervise the refurbishment of his medical clinic, the project lasted over 2 years. No substitutes were allowed, S guaranteed payment, there was no contract, TC worked regular hours and he was paid a rate of £500 per week. Sounds a lot like employment doesn’t it?
But HMRC decided to argue that he was self employed and undermined the importance of the factors that would make him employed.
HMRC has issued a consultation paper setting out proposals to tighten IR35 compliance by requiring organisations engaging “controlling persons” through personal services companies to deduct income tax and national insurance from fees paid to their companies.
A controlling person will be defined as someone from the contracting organisation who is able to shape the direction of the engaging organisation during the year. “This would be someone who has managerial control over a significant proportion of the organisation’s employees and/or control over a significant proportion of the budget of the organisation,”
This is a response to the 2000 senior civil servants employed through Personal Services Companies and the consultation period ends on 16th August.
It will interesting to see what tests will be applied and whether all income must be paid in this way or if it only applies to part of the income of the consultant? as its planned for 2013 the government may even change their mind as they did with Pastie Tax and Mobile Homes.
The Term “IR35” became established following a Budget press release issued by the Inland Revenue on 23rd September 1999. That press release was called “IR35”. At its simplest, IR35 is the way in which the taxman closed a loophole that was allowing many contractors and freelance professionals to avoid paying large amounts of Tax and National Insurance.
All Freelancers, Consultants and Consultancy Companies need to carefully consider the new HMRC tests released on the 9th May 2012.
Here are the 12 tests, scores shown in()
Business premises (10)
PII (2)
Efficiency (10)
Assistance (35)
Advertising (2)
Previous PAYE (minus 15)
Business plan (1)
Repair at own expense (4)
Client risk (10)
Billing (2)
Right of substitution (2)
Actual substitution (20)
A score less than 10 is high risk and a score more than 20 is low risk. Fail the test and it could cost you a great deal in tax.
