It is common practice in the UK for individual contractors to contract their services to clients through a Personal Service Company (PSC), rather than be on the client's payroll as an employee. This could be as a cover for maternity leave, an IT contract or simply as a means to build a consulting business from scratch.
This arrangement provides a variety of tax advantages, such as avoidance, not evasion, of PAYE and National Insurance.
The PSC in most cases would raise an invoice to the engaging company, with VAT where applicable, and records this as trade income as opposed to employment income which is totally legitimate and legal.
HMRC has recently opened consultation into this practice as it seeks to counter this advantage by requiring the engaging company to deduct PAYE & NI at source before paying the invoice of the intermediary company.
The IR35 legislation enacted in April 2000 was designed specifically to ensure that persons who control these PSCs that obtained contracts from clients, pay the relevant PAYE & NI is there engagement would be one of employment were it not for the imposition of the PSC.
This consultation now aims to shift that responsibility onto the contractor's client which would create a raft of unwelcome results the least of which would be:
· The client in deducting PAYE & NI at source would then need to make payments of employer's NI adding additional costs to the client
· The employment status now being afforded to contractors may result in the need to provide all the benefits that normal employees enjoy
The consultation document has raised quite a few questions for us here at Harvey Edwards, namely:
1. How is VAT to be treated, now that the trade income of the PSC will become the employment income of the director?
2. Are we now to assume that where the PSC accounts are concerned there will be no income to report?
3. Wouldn’t it be more commercially viable to use the current IR35 legislation as a means to grant amnesty to those contractors who have failed to account PAYE & NI; similar to the amnesty provided to the medical profession, plumbers & electricians which have yielded great success for HMRC?
To read the consultation document in its entirety please click here.
For more information on this document please contact:
0113 815 1315
15 Queens Square, Leeds, LS2 8AJ