Background
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's Position
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.
Current Legislation
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
Our Position
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:
www.he-llp.com
0113 815 1315
15 Queens Square, Leeds, LS2 8AJ
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