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Following our newsletter last month on the 2015 Employment Intermediaries legislation and the potential impact on contractors, we have been running a Q & A Forum.
As promised, please find below the most commonly asked questions together with our answers.
Q: What if I work for a client based outside the UK?
A: If your client is based outside the UK, then you will be outside the scope of this legislation.
Q: What if I work for an agency that is not based in the UK?
A: Similarly, if you work for an agency that is not based in the UK, then you will be outside the scope of this legislation.
Q: Is a Personal Service Company the same as a limited liability company?
A: Whilst a Personal Service Company is most commonly a Limited Company, this does not have to be the case. It could be a Partnership or an individual working as a Sole Trader. This ambiguity is the result of there being no specific definition in law on how a Personal Service Company needs to be constituted.
However, in the contracting sector, a Personal Service Company is deemed to be the vehicle through which a contractor provides their professional services to clients, either directly or through an agency.
Typically, this vehicle is a Limited Company where the contractor is the sole Director and the majority shareholder.
Q: Can you expand how these steps are beneficial to a limited company?
Many of you have taken other steps such as:
A: Once a contractor has set up a Limited Company, at the extreme end, they could pay themselves a salary below the Income Tax and National Insurance thresholds, have minimal third-party payments and extract all the Retained Earnings as Dividends. However, this would in all likelihood be red-flagged by HMRC under National Insurance avoidance legislation.
Our advice to our clients is to pay a salary commensurate with the role that, at the very least, is at the National Minimum Wage level and to be seen to run their Limited Company as business.
The steps outlined above each reinforce that the Limited Company is a business. Essentially, the more documents in the business name the better. Be it a Professional Indemnity Insurance certificate, a domain registration, a receipt for office equipment, an invoice for a training course, a workplace pension scheme or a business card.
Q: Would it help to diversify the business revenue streams in order to stay out of IR35?
A: Whilst the Employment Intermediaries legislation does not directly impact IR35, it will provide HMRC with a raft of information on each and every contractor working for a UK-based client through a UK-based agency.
From that perspective, diversifying the revenue stream of the business is one of the measures we would advocate, whether this is by working for multiple clients or using the earnings to fund product development or business investments.
Depending on the contractor’s circumstances, taking regular breaks between contracts helps validate that you are not an employee of any client.
We would also recommend, where possible, to enter an arrangement with a third-party contractor to act as your substitute if and when required.
Q: How will submitting the information work? Some sort of web portal?
A: It is the Employment Intermediary that will be required to submit the information to HMRC.
HMRC has recently published ‘Employment intermediaries: data requirements for software developers’ that details the obligatory items for the submission template for workers placed with clients who are not paid using PAYE.
The link for this is
https://www.gov.uk/government/publications/employment-intermediaries-support-for-software-developers
As one of our clients summarised, “This new legislation doesn’t change the criteria determining whether you fall under IR35. The significance for contractors is that HMRC will have information more readily available, so investigations might be more likely to happen but no more or less likely to succeed.”
Our primary advice is to take some of the steps outlined in the original newsletter and in this Q & A to reduce the risk of your Limited Company being selected for investigation.
If you have concerns over your Personal Service Company, we have a limited number of free Company Healthchecks available which are offered on a first come, first served basis and without obligation on you. Please email us at welcome@cooperfaure.co.uk for more information.
The Marriage Allowance is scheduled to come into effect in the 2015-16 tax year.
In a major change to the personal tax regime, this could enable you to transfer up to £1,060 of your Personal Allowance to your husband, wife or civil partner. This, in turn, could reduce their Income Tax by up to £212 in the year.
You will be able to claim the Marriage Allowance if all four of the following conditions apply:
If this is the case, you can now register online at https://www.tax.service.gov.uk/marriage-allowance/register. HMRC will then contact those who have registered in April and invite them to apply.
The £1,060 limit will increase automatically in line with any increase in the Personal Allowance in future tax years.
If you would like to discuss the Marriage Allowance in particular or your tax affairs in general, please email us at welcome@cooperfaure.co.uk for an initial consultation that is free and without obligation.
Under the original HMRC proposal, the deadline for individuals to enter negotiations under the Contractor Loan Settlement Opportunity for the tax years up to and including 2010-11 was 9th January 2015.
HMRC has now extended the closing date to start discussing a settlement to 30th June 2015 which should result in a settlement being agreed by 30th September 2015 at the latest.
In addition, in light of the feedback they have received, HMRC have clarified some points:
Accelerated Payment Notices
There is no undertaking that Accelerated Payment Notices (APNs) will not be issued before 30th June. If you receive an APN you must act within the specified time limit even if you are discussing settlement with HMRC.
If a settlement is reached within the specified time limit and the amount due is paid, the APN will be withdrawn.
If a settlement is reached after the APN has been paid, then this payment will be treated as a payment on account against the final amount due.
Tax Case Decisions and European Union Law
Recently, a number of high-profile cases involving loans from an Employee Benefit Trust (EBT) have been decided in the taxpayer’s favour. HMRC asserts that these cases are not relevant to Contractor Loan scheme users as none involved offshore employers or the Transfer of Assets Abroad rules.
HMRC also contest the view that Transfer of Assets Abroad rules cannot be applied as it would breach the individual’s rights under European law. Their view is that the legislation can apply if the arrangements subject to charge can be shown to be artificial.
As we have stated in the past, this all remains a matter of opinion. At this stage, HMRC has neither won nor lost a ruling against a Contractor Loan scheme.
Time to Pay
In circumstances where an individual agrees a settlement but has insufficient funds to pay the full amount within ninety days, HMRC is offering a simplified Time to Pay procedure for a period of up to two years.
As large a payment as possible will be required within the initial ninety days. The balance will then be payable over the remainder of the period subject to assurances that the proposed instalments can be met and so long as:
HMRC will no longer require a Statement of Assets and Liabilities or Income and Expenditure form for an instalment offer of up to two years to be agreed.
Where more than two years would be needed to pay, HMRC will discuss the circumstances and proposal but are keen to emphasize that wish to work with the individual to reach an agreement.
In deciding whether the Settlement Opportunity is the route that you wish to take, it is important to reiterate that the HMRC view on Contractor Loan schemes remains an opinion that is yet to be successfully tested. In this regard, nothing has changed since our last newsletter in August 2014.
In addition, it is important to remember that the legally binding aspect of the Settlement Opportunity works both ways. If you agree a settlement with HMRC and, subsequently, they fail to win a judgement that your Contractor Loan scheme was not tax-compliant, you have no recourse to recover the tax paid as part of the settlement.
Having said that, the simplification of the Time to Pay procedure is a further incentive from HMRC.
If you would like to request a non-binding tax and interest calculation from HMRC that would include any potential Inheritance Tax arising if a trust structure was used, this can be submitting a DO3 form to HMRC.
We are currently working with a number of clients on this matter and would be pleased to review your circumstances. Please email us at welcome@cooperfaure.co.uk for further details.
The 2013 Autumn Statement introduced legislation that targeted certain Employment Intermediaries that disguised employment as self-employment which was particularly common in the construction industry.
From 6th April 2014, personnel must be treated as an employee for Income Tax and National Insurance purposes if the personnel:
As a contractor working through their own Personal Service Company is deemed not to be controlled in how they do their work, this legislative change has no impact.
However, a consultation finished on 25th November 2014 on a second piece of legislation that comes into effect from 6th April 2015 whereby Employment Intermediaries must report on a quarterly basis the details of personnel they place with clients who are neither direct employees nor being treated as employees. In other words, contractors.
The Employment Intermediary will be required to provide the following information for each contractor:
The deadline for the report covering the 6th April to 5th July 2015 quarter is 4th August 2015.
It is important to stress that this legislation remains targeted at Employment Intermediaries avoiding employment taxes and statutory employment rights.
Furthermore, from the contractor’s perspective, the IR35 legislation remains unchanged with the basket of factors (including substitution, control and mutuality of obligation) used to determine whether or not a de facto employment exists.
Notwithstanding the HMRC’s primary motivation, this new legislation will provide them with a raft of data on each and every contractor.
As we know from our clients, a Personal Service Company can be operated in a myriad of ways. In addition, other taxes such as Corporation Tax come into play.
As a result, the HMRC will be hard pressed to follow a global approach in the future in the same way as there are currently with Contractor Loan Schemes.
However, the warning signs are there. We cannot overstress the importance of taking steps to underline that your Personal Service Company is a business and not merely a shell to avoid tax.
As we have consistently advised our clients, the era of remuneration comprising a minimal salary below the employment tax thresholds and high Dividends should be consigned to the history books. This will be all the more imperative from April.
Our key recommendations are:
In addition, there are other steps that you could take such as:
We anticipate that this newsletter will generate a large number of questions and, as a result, we are offering a free Q & A forum. If you email your question to us at welcome@cooperfaure.co.uk by Wednesday 14th January, we will include it and our response in a Q & A newsletter we will be publishing on Friday 16th January.
If you have deeper concerns over your Personal Service Company, we have a limited number of free Company Health Checks available which are offered on a first come, first served basis and without obligation. Please email us at welcome@cooperfaure.co.uk for more information.