Anyone who runs a limited company and works as a freelance consultant or contractor will be aware of IR35 and how it can affect their tax liability. The IR35 legislation was originally introduced in the 1990s to expose taxpayers who were effectively employees but were being paid for their services through a limited company and therefore able to reduce their tax and national insurance liabilities.
Last year this issue hit the headlines when BBC personalities, for example Fiona Bruce and Jeremy Paxman, plus senior civil servants and other high-ranking public sector workers were found to be using personal service companies to reduce their tax liabilities, although arguably they were effectively employees who bore none of the risks of being self employed.
The Government has been threatening to review IR35 legislation for a long time, and at the start of April 2013, took its first steps towards tightening up the rules. This latest change will have an immediate impact on clients who are officers of a company, and provide their services through that company as for example, executive or non executive directors.
When does IR35 apply?
To establish whether IR35 applies, HMRC looks at the nature of the relationship between the worker and engager. Where the relationship could be considered employment, were it not for the involvement of the intermediary entity, then IR35 legislation usually applies. Where IR35 legislation does apply, any income received by the intermediary (company) is regarded as employment income and subject to income tax at the relevant rates. For higher rate taxpayers this is now 45%.
How has IR35 been extended?
In April 2013, existing IR35 legislation was extended, making it applicable to company office holders such as non-executive directors when they are engaged through a third party intermediary such as a private service company (PSC).
This extension effectively applies in any case where, if it were not for the presence of the intermediary, the services provided by the office holder could be regarded as employment. By extending the legislation, HMRC now has the power to invoke IR35 rules and recover taxes it considers to be outstanding from office holders where previously they would not have been liable to pay income tax on their earnings under PAYE.
Our advice to clients who hold positions on the board of different companies and are paid through a limited company, is to contact us to discuss how to manage the tax implications. For more information email Lesley Stalker at las@rjp.co.uk.