Employees in disguise?
Latest developments on IR35 and the NIC employment allowance: are you on top of them?
One of the practical aspects of whether an individual is an employee or has some other status comes into very sharp focus when considering the HMRC IR35 Regime. This was introduced in 2000 as a way of cracking down on what HMRC perceived to be an abuse of the taxation system, whereby an individual would provide their services to an end user client via their own personal service company (PSC).
The effect of that was that the individual would be paid by way of dividends from the PSC and the company itself would only pay Corporation Tax. The employee would avoid paying National Insurance contributions and thus it was a much more advantageous taxation system than if the employee paid tax via PAYE.
Clamping down on abuse of the system
IR35 was brought in to clamp down on what was seen as an abuse of the system and the consequence of IR35 applying is that the sums received by the PSC are treated as employment payments by that company to the worker and thus subject to PAYE. In addition HMRC may also charge interest and penalties to the PSC on the Tax and National Insurance contributions that should have been paid at the appropriate time but are overdue.
Although there is no law to this effect and it is not entirely conclusive, if HMRC have held that an individual falls within the IR35 Regulations it is likely that an Employment Tribunal would decide that the individual is in fact an employee. Whilst not the only factor considered by a Tribunal, HMRC’s determination would be a strong indication of the individual’s employment status.
HMRC provides guidance on whether a person is employed or self-employed and that can be found at www.gov.uk/government/collections/employed-or-self-employed.
The July 2015 budget looked at PSCs and there were several announcements that impact on them. From 2016/17 the NIC employment allowance will not be available to companies whose sole employee is the shareholder/director. From 6 April 2016 the tax credit on dividends has been abolished and dividends will be taxable depending on the tax payer’s marginal rates. In addition HMRC is running consultations on amending the legislation.
If you have a personal service company or you are a business that engages individuals via PSCs then you should take note of the IR35 system and make sure that you are on top of the latest developments.
If you need more assistance please speak to us or your accountant.