IR35 | Redego Umbrella Company | PAYE Umbrella Company for Contractors

Why freelancers are still Government targets

Posted by Redego | Posted in News | Posted on 02-10-2009

Tags: Contractor, Freelancer, Freelancing, IR35

In last week’s Money Section of The Sunday Times the focus was very much on what all the main parties may take away in terms of ‘tax breaks’ if they form the next government. One of the eight key areas that the various tax luminaries interviewed thought would be on the political agenda was Setting up Companies because of the more favourable tax rates where profits are less than £300,000.

It is true that with previous recessions people have been forced out of careers and into freelancing, nevertheless it is difficult to agree with The Sunday Times view that to take advantage of lower tax rates we will “see a rush of high income earners to incorporate”, because as was pointed out in the article, one will need to be able to demonstrate that one is self employed.

However, it was interesting that one expert specifically referred to the Government potentially looking to tighten up the distinction between self employment and employment. The recent “False Self Employment in the Construction Industry” consultation paper which would spell the end of the labour-only subbie suggests that this is more than speculation. Can we therefore expect HMRC to try to reverse its poor yield from IR35 enquiries and start a new campaign against the freelancer? Or should we anticipate that Labour, or indeed whoever wins next year’s election, has something even more draconian in mind?

Also of concern was a reference to the Arctic Systems case being revived by Labour. Does this mean we will see Income Shifting make a return in the Chancellor’s autumn Pre-Budget Statement? The Government would love to stop small businesses distributing profits between husband & wife in favour of the spouse with the lower tax band, but can it come up with any legislation that is more workable than the 2008 draft which was dropped allegedly because of the recession?

What is evident from this line of thinking is that the second decade since the introduction of IR35 is likely to start off just as taxing for the freelancer. And as ever, it is important that contractors continue to take sound advice and be vigilant about how they protect their livelihood from an unhealthy interest by the taxman.

Intermediaries Legislation (IR35)

Posted by Redego | Posted in Articles | Posted on 06-08-2009

Tags: IR35, MSC legislation, National Insurance, PSC

The Intermediaries legislation was introduced on 6th April 2000. It was first proposed by the Chancellor in the 1999 Budget and details were given in the Budget press release numbered IR35. Following extensive consultation, revised proposals were announced in a new press release dated 23 September 1999. However, the legislation is now commonly referred to as ‘IR35’.

The aim of the legislation is to eliminate the avoidance of tax and National Insurance Contributions (NICs) through the use of intermediaries, such as Personal Service Companies or partnerships, in circumstances where an individual worker would otherwise -

For tax purposes, be regarded as an employee of the client; and

For NICs purposes, be regarded as employed in employed earner’s employment by the client.

Prior to the introduction of the legislation, an individual could avoid being taxed as an employee on payments for services and paying Class 1 NIC by providing those services through an intermediary. The worker could take the money out of the intermediary, normally a Personal Service Company, in the form of dividends instead of salary. As dividends are not liable to NICs, the use of a dividend remuneration strategy results in the worker paying less in NICs than either a conventional employee or a self-employed person. And PAYE would not apply to the dividends.

The legislation ensures that, if the relationship between the worker and the client would have been one of employment had it not been for an intermediary the worker pays broadly tax and NICs on a basis which is fair in relation to what an employee of the client would pay.

On 6 April 2007 Chapter 9 ITEPA 2003, more commonly known as the Managed Service Company (“MSC”) Legislation, was introduced. The MSC Legislation applies to individuals providing their services through intermediaries which meet the definition of a Managed Service Company.

An intermediary must consider whether the MSC Legislation applies before considering IR35. Intermediaries that do not meet the definition of an MSC must continue to consider IR35.


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