The ‘IR35’ rules are intended to prevent the avoidance of tax and National Insurance Contributions (NICs) using personal service companies (PSC) and partnerships. The rules only affect you if you:
  • Work for someone else or provide your services to clients; and
  • You would be considered to be their employee (in law) but for the existence of your limited company or partnership.

Thus this could affect you if you provide your services through a company and have one or two customers for whom you effectively work full-time. On the other hand, if you provide your services to many customers you are far less likely to be affected.

The rules do not stop you supplying your services through your own company or a partnership. However, they do seek to remove any possible tax advantages from doing so.

The IR35 shorthand reference to these rules dates back to when they were first introduced by the 35th IR press release of the Chancellor’s Budget in 2000.

Removal of tax advantages

The tax advantages mainly arise by extracting the net taxable profits of the company by way of dividend. This avoids any NICs which would generally have been due if that profit had been extracted by way of remuneration or bonus. The new dividend tax structure which came into effect from 6 April 2016 will also impact on the benefits of operating via a limited company.

The intention of the rules is to tax most of the income of the company as if it were salary of the person doing the work.

If you are within the rules

The main points to consider if you are within the IR35 rules are:
  • the broad effect of the legislation will be to charge the income of the company to NICs and Income Tax, at personal tax rates rather than corporate tax rates;
  • there may be little difference to your net income whether you operate as a company or as an individual;
  • to the extent you have a choice in the matter, do you want to continue to operate through a company?
  • if the client requires you to continue as a limited company, can you negotiate with the client for increased fees?
  • if you continue as a limited company you need to look at the future company income and expenses to ensure that you will not suffer more taxation than you need to.

Providing services to the public sector

Effective from April 2017, the rules for individuals providing services to the public sector via an intermediary such as a PSC has changed. The new rules shift the responsibility for deciding whether the IR35 legislation applies from the intermediary itself to the public sector receiving the service.

HMRC’s guidance will help public authorities, employment agencies, and other third parties who supply labour to identify if the contracts they have are within the scope of the changes. The new provisions apply where a worker personally performs services or is under an obligation to personally perform services for a public sector client.

In addition, the worker must be providing the services via an intermediary (usually a PSC) and the services must be such that if the contract had been directly with the client, the worker would be regarded for Income Tax purposes as an employee of the client.

The new rules also bring managed service company’s (MSC) within the scope of the new rules if all the conditions outlined above apply. The 5% flat rate allowance that currently applies to PSCs will also be removed when working with the public sector.

There are a number of scenarios that fall outside the scope of the reforms. For example, there is separate guidance where an agency directly employs a worker supplied to the public sector and PAYE and NIC is deducted. The rules will also not apply where a public authority has fully contracted out services to a service provider and the workers do not personally provide their services to the client.

Whilst the IR35 rules have not changed it is likely that the public sector receiving the services will take a more stringent approach to applying the rules. There are concerns that many agency staff will move away from supplying services to the public sector and instead work in the private sector where the changes do not currently apply.

Employment v self-employment

The question as to whether you would be an employee or not (but for the use of your company) is fundamental to the IR35 rules. The taxman will want to know how the relationship operates between you and your client regardless of the terms of any agreements or contracts. These will also be important but they cannot change the facts. This is because the dividing line between employment and self-employment has always been a fine one. All relevant factors will be considered, but overall it is the intention and reality of the relationship that matters.

The table below sets out the factors which are relevant to the decision.

HMRC will consider the following to decide whether a contract is caught under the rules
Mutuality of obligationthe customer will offer work and the worker accepts it as an on going understanding?
Controlthe customer has control over tasks undertaken/hours worked etc.?
Equipmentthe customer provides all of the necessary equipment?
Substitutionthe individual can do the job himself or send a substitute?
Financial riskthe company (or partnership) bears financial risk?
Basis of paymentthe company (or partnership) is paid a fixed sum for a particular job?
Benefitsthe individual is entitled to sick pay, holiday pay, expenses etc.?
Intentionthe customer and the worker have agreed there is no intention of an employment relationship?
Personal factorsthe individual works for a number of different customers and the company (or partnership) obtains new work in a business-like way?
HMRC have published guidance designed to help contractors self-assess their possible liability to the IR35 rules.
The Business Entity Tests (BETs) that businesses could take to self-assess their risk of IR35 were withdrawn with effect from 6 April 2015. HMRC will not re-visit a closed enquiry based on a result of the BETs within the 3 year period previously notified to the business.

Exceptions to the rules

If your company has employees who own 5% or less of the shares, the rules will not be applied to the income that those employees generate for the company.

Note however that in establishing whether the 5% test is met, any shares held by ‘associates’ must be included.

How the rules operate

The company operates PAYE & NICs on actual payments of salary to the individual during the year in the normal way.

If, at the end of the tax year – ie 5 April, the individual’s salary from the company, including benefits in kind, amounts to less than the company’s income from all of the contracts to which the rules apply, then the difference (net of allowable expenses) is deemed to have been paid to the individual as salary on 5 April and PAYE/NICs are due.

Allowable expenses
  • normal employment expenses (e.g. travel)
  • certain capital allowances
  • employer pension contributions
  • employer’s NICs – both actually paid and due on any deemed salary
  • 5% of the gross income to cover all other expenses.

Where salary is deemed to be paid
  • appropriate deductions are allowed in arriving at Corporation Tax profits and
  • no further tax/NICs are due if the individual subsequently withdraws the money from the company in a HMRC-approved manner (see below).

Related issues

Income and expenses

The income included in the computation of the deemed payment on 5 April includes the actual receipts for the tax year.

The expenses are those incurred by the company between these two dates.

In order to perform the calculations, you need to have accurate information for the company’s income and expenses for this period. You may need to keep separate records of the company expenses which will qualify as ‘employee expenses’.

Those working through a PSC can no longer claim travel and subsistence costs as expenses and incur tax relief on these costs.

Timing of Corporation Tax deduction for deemed payment

A deduction is given for the deemed payment against profits chargeable to Corporation Tax as if an expense was incurred on 5 April. This means that relief is given sooner where the accounting date is 5 April.

Will the company make a taxable loss because of the legislation?

If a company’s expenses are high the company may make a taxable loss. This can only be relieved by carry forward against future trading profits.

One reason why the projected expenses will create a loss would be where the company pays a spouse a salary. The amount of the salary may need reviewing if the IR35 rules start to apply.

Pension contributions

Payments made by your company into a personal pension plan will reduce the deemed payment. This can be attractive as the employer’s NICs will be saved in addition to PAYE and perhaps employee’s NICs.

Extracting funds from the company
For income earned from contracts which are likely to be caught by the rules, the choices available to extract funds for living expenses include:
  • paying a salary
  • borrowing from the company and repaying the loan out of salary as 5 April approaches
  • paying interim dividends.

The advantage of paying a salary is that the tax payments are spread throughout the year and not left as a large lump sum to pay on 19 April. The disadvantage is fairly obvious!

Borrowing from the company on a temporary basis may mean that no tax is paid when the loan is taken out, but it will result in tax and NICs on the notional interest on the loan. There may also be a need to make a payment to HMRC equal to 25% of the loan under the ‘loans to participators’ rules.

The payment of dividends may be the most attractive route. If a deemed payment is treated as made in a tax year, but the company has already paid the same amount to you or another shareholder during the year as a dividend, you will be allowed to make a claim for the tax on the dividend to be relieved to avoid double taxation.

The company must submit a claim identifying the dividends which are to be relieved.

Year-end planning

There is a tight deadline for the calculation of the deemed payment and paying HMRC. The key dates are:
  • the deemed payment is treated as if an actual payment had been made by the company on 5 April
  • tax and NICs have to be paid to HMRC by 19 April
  • form P35 showing details of the deemed payment has to be submitted to HMRC by 19 May.

Interest on overdue tax is chargeable from 19 April if tax and NICs are underpaid on the basis of provisional figures.

It is therefore in your interests to have accurate information on the company’s income and expenses on a tax year basis and, in particular, separate records of the amount of the company expenses which will qualify as ‘employee expenses’.

Umbrella companies

This form of ‘composite’ company is unaffected by the MSC legislation. Umbrella companies also enable contractors to operate as though they have a PSC without them having to set it up and run it themselves. The big difference though between MSCs and Umbrella companies is that the latter make all payments to the contractor through the PAYE system. There is no facility to secure tax savings through the payment of dividends.

We can advise as to the best course of action in your own particular circumstances. We can also assist you with:
  • Contentious status disputes with HMRC;
  • Advice on your contract and an opinion on whether it fails or passes IR35;
  • Assistance in improving your contract for the purposes of defeating IR35;
  • Maintaining the necessary records and information to support your position; and
  • All aspects of the accountancy and tax affairs of your business.
The government is set to phase in its landmark digital tax initiative, Making Tax Digital, between 2018 and 2020.
Making Tax Digital for Business (MTDfB) is a key part of the new government initiative. From April 2018 many unincorporated businesses and landlords will be required to register, file, pay and update their financial information using a secure online tax account at least quarterly. Following consultation, the government has now made a number of key decisions.

Provision of MTDfB software
Free software will be provided to businesses with the ‘most straightforward’ tax affairs. Firms will be required to use appropriate software for the needs of the business.

Businesses will also be permitted to use spreadsheets for their record-keeping but these must meet the relevant requirements of the MTDfB scheme. The requirement to keep digital records does not mean that firms will have to make and store receipts and invoices online.

Changes to cash basis accounting
The cash basis entry threshold for unincorporated businesses has increased to £150,000. The exit threshold has risen to £300,000 – double the revised entry threshold.

HMRC is set to introduce a cash basis for unincorporated property businesses, which will serve as the default accounting method. However, there will be a choice to opt out and make use of an accruals basis. A maximum entry limit will be introduced, which is set at £150,000.

Two of the key tasks required of businesses are to report summary information to HMRC quarterly and include an ‘End of Year’ statement.

Most will be required to use software or apps to keep digital business records and make updates to HMRC at least quarterly in respect of their income tax, VAT and NICs online. When an update is due, taxpayers will have a period of one month to compile and submit their financial records. Businesses will be required to conclude their end of year activity and send their information to HMRC by either 31 January or 10 months after the last day of the period of account (whichever is soonest).

Exemptions and deferments
An exemption from MTDfB for businesses and landlords with income below £10,000 had previously been announced. Charities (but not their trading subsidiaries) will also be exempted from the need to keep records digitally.

The government also outlined that, for partnerships with a turnover above £10 million, MTDfB will be deferred until 2020.

Further changes were unveiled in the 2017 Spring Budget, including a one year deferral from the mandating of MTDfB for unincorporated businesses and landlords with turnovers below the VAT registration threshold (£85,000 from 1 April 2017). They will now be required to start using the new digital service from April 2019.

Penalties and fines
Taxpayers will be given at least 12 months to familiarise themselves with the changes before any late submission penalties are applied.

Please note that following Theresa May’s decision to call a snap General Election on 8 June, the government removed legislation to implement MTD from the Finance Bill 2017. The clauses are likely to be reinstated after the election.

As your accountants, we will be keeping you up-to-date with the latest MTD developments.
Capital gains tax (CGT) is normally paid when an item is either sold or given away. It is usually paid on profits made by selling various types of assets including properties (but generally not a main residence), stocks and shares, paintings, and other works of art, but it may also be payable in certain circumstances when a gift is made.

The most common method for minimising a liability to capital gains tax is to ensure that the annual exemption is fully utilised wherever possible. Whilst this is relatively straight-forward where only capital gains are in question, the computation can be slightly more complex where capital losses are also involved.

Where a loss arises on the sale of assets it can be offset against any other gains made in the same year or in the future. However, a strict order applies for setting-off losses.

Firstly, losses arising in the tax year are deducted from any other chargeable gains for the same year. All losses for the year must be deducted, even if this results in chargeable gains after losses below the level of the annual exempt amount. If the allowable losses arising in the tax year are greater than the total chargeable gains for the year, the excess losses can be carried forward to be deducted from chargeable gains in future years. In this situation, the annual exemption for the year in question may be lost.

If chargeable gains remain after deducting the allowable losses arising from the same year, unused allowable losses brought forward from an earlier year may then be deducted. It is only necessary to deduct sufficient allowable losses brought forward to reduce the chargeable gains after losses to the level of the annual exempt amount. Any remaining losses brought forward are carried forward again without limit, to be deducted from chargeable gains in future years.

Plan ahead

For 2017/18, most individuals will be entitled to an annual exemption of £11,300, which means that no CGT will be payable on gains up to that amount for that tax year. Since spouses and civil partners are each entitled to the exemption, for jointly held assets, there is scope for exempting £22,600 worth of gains in 2017/18.

The annual exemption is good only for the current tax year - it cannot be carried forward or taken back to an earlier year - so anyone planning to make a series of disposals, may want to consider the timing of sales between two or more tax years to use up as much and as many annual exemptions as possible.
Pension auto enrolment, which requires employers to automatically enrol eligible workers into a qualifying pension scheme, has been described as the biggest shake-up of workplace entitlements for decades.

1) Know your staging date and develop a plan
Your ‘staging date’ is the date from which your auto enrolment duties first apply. It is determined by the total number of people in your largest PAYE scheme, based on HMRC’s records as at 1 April 2012. You can find out your staging date by visiting the Pensions Regulator website.

2) Assess your workforce
You will need to identify any eligible jobholders working for you. Automatic enrolment is required for those who:
  • are aged between 22 years and the state pension age
  • have qualifying earnings above the earnings trigger for automatic enrolment (£10,000 in 2014/15)
  • are working or ordinarily working in the UK
  • are not already a member of a qualifying pension scheme.

You will also need to consider whether you have an employer duty in relation to other types of workers including non-eligible jobholders and entitled workers.

3) Review your pension arrangements
Decide on the type of pension scheme you will offer. Do you have an existing scheme that meets (or can be changed to meet) the Government’s requirements, or will you need to set up a new one?

4) Communicate the changes
Employers are required by law to write to most workers explaining what automatic enrolment into a workplace pension means for them. There are different information requirements for each category of worker.

Make sure you have a strategy in place for briefing employees and plan how you will manage any queries that arise.

5) Automatically enrol eligible jobholders
Under the new regulations, employers are required to: provide information to the pension scheme about the eligible jobholder; give enrolment information to the eligible jobholder; and make arrangements to achieve active membership for the eligible jobholder. This should be carried out within the ‘joining window’ (the one-month period from the eligible jobholder’s automatic enrolment date).

6) Register with the Pensions Regulator and keep records
All employers will need to register online with the Pensions Regulator within five months of their staging date.
Employers must also keep specific records about their workers and their pension scheme(s).

7) Contribute to workers’ pensions
From October 2018 all businesses will need to contribute at least 3% on the qualifying pensionable earnings for eligible jobholders. Compulsory contributions will be phased in over a number of years.
Employers are also required to make contributions for non-eligible jobholders who choose to opt in to the pension scheme.

Whatever your staging date, it is important to prepare for auto-enrolment in good time.

If you require any further advice, or would like to find out more about our auto enrolment services please contact us