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The so called IR35 Legislation came into force in the UK in April 2000. It seeks to tax freelance workers providing services via their own limited company. Its stated aim was to prevent employees setting up a limited company and performing their duties through that company with the resulting tax advantage.

Generally it is more efficient for the owner of a limited company to extract remuneration through a small salary and dividends. This saves on the payment of National Insurance and leaves the owner with a greater net figure than if he was having PAYE & NI deducted.

It was in fact designed to deal with a common scenario in the IT industry where employees left their jobs on a Friday and started back on the Monday as “consultants” doing exactly the same job. I used to know one IT consultant who claimed to be freelance working in the same office doing the same job for over 10 years. He really was an employee in all but name but he paid far less tax and NI and his “employer” also got round a whole raft of employment legislation as well as save 10% Employers NI contributions.

However, as drafted the legislation caught a whole lot of genuine people working through a limited company for other reasons. As ever the sins of a few have been visited on the vast majority of innocent people.

Employers have regular PAYE audits carried out by HMRC officers. When they come across companies contracting with service companies they will closely examine at the working relationship between employer and the service provider from a number of angles for example the degree of control the end user has, and the financial risk the provider has i.e. is he paid by the hour/day or on a fixed price for a specific task.

There are many other factors which comprise evidence or otherwise of being deemed a service company, but importantly, each case is considered on its own merits should HMRC challenge the company status.

If a company is deemed to be a service provider, then the remuneration is worked out by deducting a fixed amount (5%) of expenses from the turnover, then any expenses that would have been allowable as an employee.  The resulting figure is then deemed to be gross pay plus employers NI. The PAYE and NI for the tax year have to be paid by the 19th April after the tax year.

There are lots of people offering services designed to help you decide whether or not you will get caught by IR35 but there is no single guaranteed way – each case is considered separately.

So as it is not always obvious whether a service company will be caught by the IR35 legislation you should always seek professional advice. If you need an introduction to someone just let me know.

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Category: Taxation  
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