It is coming up to 20 years since the then Labour government introduced the concept of taxing individuals as employees, where they provided their services to a third party through a personal service company or partnership. More commonly referred to as ‘IR35’, various rule changes have been introduced since then and a much heralded introduction of the rules into the public sector arena means that IR35 is an important concept to handle. Added to this, the costings in the October 2018 budget have made it clear that the anticipated tax revenue from IR35 will be a significant amount – far greater than the new tax on digital services – and we can expect HMRC to keep an ever closer eye on the application of the legislation.
As a result of the above, it is worth a brief reappraisal of the IR35 rules and who might be affected.
The fundamental premise of IR35 is that it sets out to address a mismatch in the tax treatment of an employee compared to the tax treatment if a company (or other intermediary) receives payment for that work. With companies paying lower rates of tax than individuals, and with the payment of dividends from those companies not being subject to National Insurance Contributions (NICS) it is no surprise that these rules have been subject to exploitation.
IR35 applies where an individual (the worker) personally performs, or is under an obligation personally to perform services for another person (the client). The services are not provided under a contract between the client and the worker but under arrangements involving a third party (the intermediary) and the circumstances are such that, if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client.
The big recent change to the application of the IR35 rules relates to services provided to the public sector through intermediaries. The original legislation specifically excluded these services but this is now in the course of changing, meaning that organisations in the public sector must themselves identify whether they are to apply the IR35 rules.
As is ever the case with tax legislation, the boundaries of the law are regularly tested in the Courts and IR35 is no exception to this. Those of us in the Leeds and Yorkshire region will be familiar with the continued presence of Christa Ackroyd on BBC local news services up to a couple of years ago. Christa Ackroyd’s services were supplied to the BBC by way of an intermediary company which received payment from the BBC for her services, and then paid corporation tax at the prevailing rate, which will have been significantly lower than income tax rates. It is likely that dividends will then have been paid by the company, at lower income tax rates and without the payment of NICs. HMRC were successful in the case and, at the time of writing, Ms Ackroyd is expected to have to pay income tax and NICs of over £400,000. A sobering application of the IR35 legislation.
Whether you are a TV presenter or not, if you are providing personal services through a personal company, please think carefully about the application of the IR35 rules.
If you have any questions please let me know via email at firstname.lastname@example.org. Alternatively please give me a call on 0113 231 4131.