Increasing numbers of taxpayers are considering their employment options and whether working as a freelancer or contractor might be more tax efficient. This way of operating has become more high profile after it has been disclosed in the press that some very famous BBC presenters and TV personalities are not employees, but sub-contract their services to reduce their tax liabilities.
According to reports in the Telegraph, well-known female newsreaders like Fiona Bruce, Emily Maitlis and Sophie Raworth, as well as Chris Evans and Jeremy Paxman have set up personal service companies (PSCs) to reduce their tax liabilities. The BBC has confirmed that over 4000 of its contributors are paid in this way. The ethics of operating under a PSC have been questioned widely in the media, but the fact remains that this can be a legitimate and highly effective form of tax planning.A PSC is the term used by HMRC to describe a one-person limited company, this is a structure commonly used by freelancers, IT contractors, interim managers, project management consultants and other professionals with specialist skills. Provided the company meets the criteria specified by HMRC guidelines, an individual providing services through a PSC has access to tax planning opportunities that are not available to direct employees.
How to avoid falling foul of IR35
HMRC argues that PSCs are commonly caught by the IR35 legislation. This essentially seeks to charge the PSC (and the income received from the PSC) to additional tax which will put the individual concerned in the same tax position as if he had been employed directly rather than engaged through the PSC.
There are a number of areas to be aware of to ensure your PSC is not at risk of being caught by the IR35 legislation. Some ways in which you can help to ensure this are firstly by avoiding being paid by the hour for work undertaken for customers; this will mean you have no opportunity for risk or reward and will put you in the same position as an employee. Secondly you should have the freedom to decide where and when the work undertaken is actually carried out. In addition, you should have the right to substitute yourself with another worker to complete any assignments. If the facts of the appointment genuinely substantiate these issues you will be in a strong position to demonstrate that the company is legitimately a service provider and that you are not simply an employee trying to avoid tax.
What to expect when running a PSC
Admin – working in this way means having to submit monthly invoices, keep accounting records and complete company accounts each year, together with a corporation tax return for the company, and annual Companies House requirements. If the company’s turnover exceeds the VAT threshold, it will be necessary to register for VAT, charge VAT and complete quarterly VAT returns. It might be beneficial to register for the flat rate VAT scheme, and this should be discussed with your accountant.
An expenses allowance – as an employee of the company you are eligible to reclaim business expenses paid personally provided they are ‘wholly and exclusively’ required for business purposes. A record of all expenses incurred should be maintained on an ongoing basis, with evidence kept in the event of an enquiry by HMRC. At the end of the tax year, the company will need to complete form P11D to declare the reimbursed expenses to HMRC – it may alternatively be that a dispensation can be claimed, and you should discuss this with your accountant.
Lower taxes – tax planning opportunities exist when running a company. These include areas such as dividend and salary planning, and delaying the receipt of personal income which will fall into higher tax brackets.
Red tape – a limited company is obliged to maintain statutory records and file an annual return to Companies House. These activities can be time consuming and are often taken care of by a company secretary. In addition to the annual return, companies will need to run a PAYE scheme, covering issues such as forms P11D, P60 and P14.
Over the last few years demand for contractors and specialists working through limited companies has grown steadily as companies seek more flexible ways obtaining the skills they need. It is undoubtedly a very tax efficient way of working and a popular lifestyle choice. As HMRC continues to step up its efforts to tackle tax avoidance any taxpayers thinking about setting up a PSC should take expert advice to ensure they will not be exposed to the IR35 legislation.
For expert tax advice on setting up a PSC and contracting, please contact Lesley Stalker by emailing las@rjp.co.uk.