HMRC provides guidance on how to determine where IR35 applies
HMRC has for some time been challenging the status of individuals who provide their services through an intermediary or personal service company. These companies are popular with persons who can use them to minimise PAYE and national insurance contributions.
The legislation enabling this challenge is to be found in section 49 Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), but is commonly referred to as IR35 after the press release when it was first announced. It applies where the worker would be treated as an employee if the company did not exist.
There was some expectation that the Autumn Statement would introduce further legislation to restrict these companies, but the draft legislation is confined to persons operating through an offshore agency, where the necessity for actual ‘personal service’ has been removed and replaced by on obligation for personal service.
It also intends to stop agency workers working through limited companies, which at present is an alternative to the agency deducting PAYE.
HMRC issued a press release in February 2000, listing various tests to indicate employment status. It issued further guidance in May 2012 as Business Entity Tests.
There are 12 tests:
If the company is caught by the rules, it is necessary to calculate a deemed salary payment; the calculation is prescribed in section 54 ITEPA 2003 as follows:
Example | £ | £ |
Income from relevant engagements | 100,000 | |
Less 5% deduction | -5,000 | |
95,000 | ||
Less: | ||
Travel expenses | 2,000 | |
Salary paid | 12,000 | |
Employer's NIC (12,000-7,696) @13.8% | 594 | |
-14,594 | ||
Gross deemed payment | 80,406 | |
Less: Employer's NIC (80,406-7,696) @13.8% | -9,750 | |
Net deemed employment payment | 70,656 |
The deemed salary is subject to PAYE and employee’s Class 1 NI.