HMRC have recently withdrawn their guidance in relation to IR35 and in the recent Summer Budget have announced that they intend to review the effectiveness of the provisions due to the high level of non-compliance with the rules. The ‘IR35’ rules are designed to prevent the avoidance of tax and national insurance contributions through the use of personal service companies and partnerships.
The rules do not stop individuals selling their services through either their own personal companies or a partnership. However, they do seek to remove any possible tax advantages from doing so. The tax advantages mainly arise by extracting the profits of the company by way of dividend (although this advantage may need to be re-evaluated when the new rules on the taxation of dividends announced in the Summer Budget come in to force from April 2016). This avoids any national insurance contributions which would generally have been due if that profit had been extracted by way of remuneration.
The intention of the rules is to tax most of the income of the company as if it were salary of the person doing the work. Broadly the rules apply if, had the individual sold their services directly rather than through a company (or partnership), they would have been classed (by HMRC) as employed rather than self-employed. For example, an individual operating through a personal service company but with only one customer that they effectively work full-time for is likely to be caught by the rules. On the other hand, an individual providing similar services to many customers is far less likely to be affected.
If you have any concerns in this area please contact your usual Streets Partner or your local office.