IR35 is a nightmare for contractors, since it came into force on the 6th April 2000, it has never been clear cut as to whether a contractor is in or out of IR35. Being in IR35 means paying a lot more tax.
There are a range of factors to consider, including:
1. The nature of the contract and written terms
2. Right of substitution
3. Mutality of obligation
4. Right of control
5. Provision of own equipment
6. Financial risk
7. Opportunity to profit
8. Length of engagement
9. ‘part and parcel’ of the organization
10. Entitlement to employee-type benefits
11. Right of termination
12. Personal factors
13. The intention of the parties
HMRC estimate that there are 200,000 personal service companies.
Since July HMRC have been pursuing BBC Presenters and so far it looks like 100 presenters are on their list, this will of course be the tip of iceberg and many more will be caught if HMRC win.
Why can’t we just have a simple online test for IR35 as we do with employment status! it would save so much confusion
In the Budget 2016 George Osborne announced that as from April 2017 it will be the duty of the Public Sector to make sure Personal Service Companies and Intermediaries pay the correct tax.
The government announced at Budget 2016 that it will reform the intermediaries legislation (known as IR35) for public sector engagements. It will do this by moving the liability to pay the correct employment taxes from the worker’s own company to the public sector body or agency / third party paying the company. In partnership with stakeholders, HM Revenue and Customs will develop a new tool that will make the decision on whether or not the rules should apply as simple as possible and provide certainty. A formal consultation will be published later. [Technical Note]
The organisations checking intermediaries will include:
Government departments, legislative bodies, armed forces
Schools and further and higher education institutions
The British Museum, BBC, Channel 4
Transport for London
Publically owned bodies
It will be the engagers duty calculate the deemed employment income.
Here are 3 examples…
Will this lead to higher taxes for contractors? will they be converted to employees?
Dozens of NHS executives face possible investigation by HM Revenue and Customs after they refused to answer questions about their tax arrangements, it can be revealed.
An investigation has identified 86 senior health service officials paid off-payroll who have refused to give assurances to their employers that they are paying the correct level of income tax and national insurance.
They are paid through service companies – arrangements that allow public sector employees to be paid as contractors through private companies, potentially cutting their tax bills.
Monitor found 30 foundation trusts had issues to resolve in their report of the 10th July 2014:
20 foundation trusts have 1 or more senior employees paid through an off-payroll arrangement, and they are waiting for responses after asking those employees for assurance about their tax arrangements
23 foundation trusts (including some of the 20 above) still have at least 1 board member or senior member of staff with significant financial responsibility employed through an off-payroll arrangement
of these 23 trusts, 9 are facing wider issues relating to their performance which they have explained is affecting their ability to recruit and retain permanent skilled staff; this resulted in the need to use interim off-payroll contracts to attract high-performing staff to help improve the foundation trust’s situation
as a result of their performance issues, these 9 trusts are facing current enforcement action by Monitor, which is unrelated to their use of off-payroll employment
out of those 23 trusts, the other 14 which are not facing enforcement action have plans to end off-payroll arrangements by the end of the year
It’s time to run your first RTI PAYE year end and you have your own limited company, how do you answer this question?
‘Yes’ if you are a service company – ‘service company’ includes a limited company, a limited liability partnership or a partnership (but not a sole trader) – and have operated the Intermediaries legislation (Chapter 8, Part 2, Income Tax (Earnings and Pensions) Act 2003 (ITEPA), sometimes known as IR35). Otherwise indicate ‘No’.
The question is now a bit more specific, which is great, because you will only answer ‘Yes’ if you have operated IR35.
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?
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:
Mutuality of Obligation
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.