“Akin
to employed” what does that mean?.
2
“Genuine
Contractor” what does that mean?
How
will I know if I am affected?
Should
I carry on working through my Limited Company?
What
changes to my company will I have to make if I am considered “akin to
employed”?
How
will the expenses I can claim change if I am caught by the new rules?
How
do the self-employment tests work to determine my status under IR35?
Will
I still be able to pay myself Dividends under the new rules?
If
I fail the tests how will I take the money out of my company?
Will
I be able to continue to pay my spouse a salary under the new rules?
What
will be the effect on my Net Income under the new rules?
Are
there any ways I can avoid IR35?
Could
I avoid the legislation by using an offshore company?
Could
I avoid the legislation by becoming self-employed directly with the end client?
Could
I avoid the legislation by setting up a company with a group of other
contractors?
Are
changes in Contracts just a fix to get me out of IR35?
Is
it still worth being a contractor?
Currently
contractors enjoy the tax saving benefits of working through a Limited Company.
The benefit will be reduced from April 2000.
In March of last year the Chancellor announced changes in the Budget and
the Inland Revenue issued press release number 35 (Inland Revenue35).
This looked at the avoidance of tax by Contractors who work through a
personal service company. The
Inland Revenue believes that Contractors have abused their self-employed status
as a tax avoidance vehicle and in fact do similar roles to that of a permanent
member of staff. The Inland Revenue
feels that the majority of self-employed persons should pay similar levels of
contribution to that of their PAYE equivalents.
From April
2000 one of the central questions in determining whether these new rules apply
to an engagement is to establish whether the worker would have been an employee
of the client if engaged directly. It
is important to recognize that if a Contractor “looks, feels and smells like
an employee” then a significant number of factors will have to change for them
to be able to demonstrate that they are in fact “genuine contractors”.
Unfortunately at the present time there is a clear confirmation that the
majority of existing contracts do not truly reflect the work being done on site,
resulting in the majority of contractors looking “akin to employed”.
The terms of
contracts used by service company workers who obtain engagements through
agencies tend to be of a standard form. Such
contracts typically require the worker to work on the client’s premises, use
the client’s equipment, work standard hours, submit weekly timesheets, be paid
at an hourly rate and be subject to a high level of to control.
In such cases, the opinion of the Inland Revenue about the engagement is
likely to be that it would be employment. If
the above applies then the contractor will be classed as “akin to employed”.
If the terms
and conditions of the engagement point to a “genuine contractor” status,
then the contractor will fall outside of Inland Revenue35 and the Limited
Company tax structure will remain unchanged.
To be deemed a
“ genuine contractor”, the consultant must demonstrate that he is not merely
working 9 to 5 on an hourly rate. He
must demonstrate that he is engaged on a project of work for which he is fully
responsible, with defined deliverables, deadlines and quality.
The
“genuine contractor” tax structure will result in the contractor being
allowed to claim both employer and employee expenses.
The salary level will generally remain low, resulting in the contractor
paying less social contributions than that of an “akin to employed”.
The
Inland Revenue have advised that they will set up a contract testing unit,
however, they will only test signed contracts and are allowed up to 28 days to
make a decision. This means that
the Contractor will potentially be on site for nearly a month before they know
how much the contract is actually worth to them.
3 sixty group have a contract testing unit set up to test which contracts
are “genuine” and which would be seen “akin to employed”.
The unit will also be able to advise if alternative contracting options
exist for a particular engagement. This
cannot be window dressing and the contract must be truly reflective of the
actual work on site
The
Limited Company will still be the most efficient way of working for the majority
of Contractors. This leaves the
Contractor in control of their own affairs and allows them the ability to switch
between “akin to employed” contracts and “genuine contracts” as
necessary to maximise their income. A
Contractor working through a Limited Company will still take home approximately
twice as much money as their PAYE equivalent.
None
at all! – However, your accountant will have to advise you of the change in
salary levels to be paid and it will be necessary to ensure that the necessary
Tax and National Insurance is set aside for payment at the end of the year.
If
you are deemed to be akin to employed then the allowable expenses you can claim
move from Schedule D to Schedule E. Schedule
D Expenses are the normal company Expenses that include items such as equipment
and training.
Schedule E
Expenses that are incurred wholly, exclusively and necessarily in the
performance of the duties of your employment will still be fully tax
deductible. These include:
 | Traveling
expenses: You are
entitled to relief for the full cost of traveling, if traveling to or from a
place you have to attend in the performance of your duty.
Unless the job at the site is expected to last for more than 24
months, in which case the site counts as a permanent work place. The Inland Revenue has confirmed that they will allow travel to and from work as an allowable expense in addition to the above travel. This will utilise the fixed car profit scheme as previously and will be available for up to 2 years in the same location. |
| Meals
and accommodation:
The full cost of meals and accommodation while traveling or staying away on
business is allowable as part of the cost of travel. |
| Car,
Van or Motorcycle:
If you use any of these from 6th April 1999, for business, you
are entitled to deduct the business proportion of the running expenses. |
| Special
Clothing: If you are
using special clothing to perform the duties of your work then that is an
allowable expense. |
| Working
at home: If you work
at home you may claim the appropriate proportion of the cost of light, heat,
telephone call and council tax. This
area must be clearly identifiable as exclusively used for the business. |
| Contribution
to an approved pension scheme.
e.g. Executive Company Pension Scheme. |
| Charitable donation. |
| Professional
subscriptions: Those
relevant to your job e.g.
Membership of IAP. |
| Directors’
liability insurance, professional indemnity insurance and work-related
uninsured liabilities. |
| Personal
Incidental Expenses (PIE):
An employee away from home overnight on business can claim £5 (VAT
inclusive) a night for things like newspapers or telephone calls. |
| Removal
and Relocation Expenses:
When an employee moves home because of his job, qualifying removal expenses
and benefits are exempt up to a maximum of £8000 per move per tax year. |
| Postage
and Stationary:
Stationary may be required by an employee to claim his or her expenses,
which may then need to be posted to the accountant of the company. |
| Mobile
Phones: are fully
allowable and the personal benefit in kind has now been removed. |
| Internet:
The cost of using the Internet for business use can be claimed. |
The tests
which will be used to determine the status of the Contractor are based around
some fairly well established, albeit very old, tests that have not been used in
the IT industry for some time (since the 1970’s) for those using Limited
Companies.
The Inland
Revenue have added a new test to the existing ones shown below.
| If
a Contractor is engaged using a standard agency contract and the
contract is for more than one month – they will automatically be
deemed to be “akin to employed”. |
The general
tests look at the following areas:
·
Direction and
Control
·
Does the Client
dictate what is to be done?
·
Does the Client
dictate the location of the work?
·
Does the Client
dictate the time the work should be done?
·
Does the Client
dictate how the work should be done?
·
Does the Contractor
use their own equipment?
·
Does the Contractor
take significant financial risk?
·
Does the Contractor
have the right to substitute an alternative person to do the work?
·
Is the contract
based on an hourly rate or is there a fixed fee for a period?
·
The length of the
engagement can have an impact
with longer contracts tending to indicate employment.
·
The right of
dismissal if available to both parties via a fixed period of notice tends
to indicate employment.
·
Does the contractor
have the ability to re-structure operations to save costs and demonstrate
sound financial management within their Limited Company.
·
Does the Contractor
gain the employee benefits of those full time workers who are stationed
around them? This would tend to
indicate employment.
·
Does the
Contractor look, smell and feel like an employee.
If they appear to be an intrinsic part of the end client they will look
more like an employee.
·
Note:
Interestingly the Inland Revenue has recently indicated that evidence of significant
investment in personal training for skills necessary to complete the
contract will be another indicator towards Self-Employment.
This training must be funded by the Contractor and not training provided
as part of a previous permanent employment.
Dividends will only be available if the company takes on contracts that are deemed to be “genuine” under IR35 – where all the engagements are deemed to be “akin to employed” there will be no money left in the company to pay dividends unless it was from previous earnings.
From
the total income to your company you will be allowed a 5% Tax and National
Insurance free bonus for running the company.
You will also be able to take schedule E (employee) expenses, as itemized
previously, also Tax and National Insurance free.
The remainder of your money must be paid as salary.
The
only option to continue paying a spouse where all the contracts are deemed to be
“akin to employed” is through the 5% bonus.
If you are
deemed to be “akin to employed” you will see a reduction in take home pay of
between 6 and 20% depending on the share split you have in place, your hourly
rate and levels of items such as salary and expenses.
Yes
- but it involves a completely different way of working and is only applicable
to a small proportion of the industry. The
additional financial risk placed on the Contractor may not be acceptable to many
Contractors and this may not be acceptable to your end-client – many of whom
do not have the infrastructure in place to set up performance based contracts
for packages of work.
No. The same
'employment' tests will apply whether your company is resident abroad,
incorporated or resident in the UK. According to the Inland Revenue:
"If an offshore service company fails
to deduct and account for PAYE tax and NICs due under the legislation, liability
to pay tax and NICs can be transferred to the worker. Action to recover
employer's NICs not paid by an offshore service company could also include
action against any assets of that company located in the UK".
The
Inland Revenue has powers to obtain details of payments to offshore companies
from the records of clients and agencies.
No. The same
IR35 rules will apply as the same Schedule D/E tests will be applied and used as
the testing mechanism. As a
corporate entity – by working through a Limited Company – you will have
greater opportunity to meet the requirements of the IR35 tests.
No
– Each engagement will be assessed individually and all could still be
considered to be akin to employed. This
in fact would look like a composite umbrella company – a structure the Inland
Revenue have already said they are going to review carefully as they consider it
a tax-stripping vehicle.
You can make sure that you get all your timesheets in to your agency before the end of March. Income received after that date may be subject to the new rules.
The new rules will only apply to income earned in respect of work done after 5 April 2000. Any money left in the company can be declared as dividends as normal.
Your current
contract may make you appear to look like you are “akin to employed” and the
new rules would apply. Your
contract may need a full review to ensure that it is an accurate description of
your engagement. If you chose to
stay under your existing contract you may find yourself paying more tax and
National Insurance than previously.
The assessment
should include discussions with your Agency, End User and IT Specialist
Accountant.
Changes to
contracts will not eliminate the problem of IR35 for all Contractors; however,
there are many Contractors who are working under contracts that do not
accurately reflect the way in which they are working.
Sarah Walker
of the Inland Revenue confirmed at the first of the meetings that she was:
·
“Happy for
contracts/arrangements to change to reflect the actual work being done”
and
·
“Happy for
arrangements to change to reflect the additional risk of being a Contractor”
There are
examples of alternative forms of contract available. It is not possible to verify if these alternative ways of
working will be accepted by the Inland Revenue until the final regulations are
approved and implemented.
Each engagement will need to be tested and the Inland Revenue has given
an agreement to provide an answer in each case within 28 days of receiving a
signed contract. The structure of
the Limited Company and the way it is contractually linked to the Agency and the
End Client have been under scrutiny by 3 sixty group for over a year
now and their leading legal experts were predicting IR35 type legislation since
Autumn 1998. This concern, sparked
by Working Time Regulations, led to a series of meetings with end users and
Agencies in 1998 where the current ways of working were discussed in detail.
Yes – There
is no doubt that contracting will continue, rates will ultimately rise and even
now Contractors affected by IR35 will take home approximately twice as much
money as their PAYE equivalents.
No. The new rules will only apply to income earned in respect of work done after 5 April 2000.