IR35 has gone through more changes than a chameleon taking a stroll over a chessboard. Big companies have done well from recent changes: they were worried about knowing is they would have to deduct tax from payments to service companies or whether they needed to register as an agency company themselves, but the government has scrapped these areas.
If you are a person supplying services through a personal service company and you are clearly a genuine business selling a service rather than merely selling labour, you can also relax. The test of whether your customer has a right of supervision, direction or control over the tasks undertaken or the manner in which they are performed has been replaced. You simply need to ask whether you would have been an employee or self-employed if you had undertaken the assignment as an individual. If you are confident that you would have been self-employed, the rules will not apply to you. But that, for most people, is the crunch.
The burden of IR35 is loaded almost entirely on to you. Under these rules you are deemed to have received a notional salary on 5 April each year equal to the company’s gross income from your services, less certain specified deductions. You are expected to pay over real PAYE and NI on this notional salary on 19 April and to include it on the P35 by 19 May. If you do not you will face the normal PAYE fines and penalties.
There are some ‘breaks’: some allowance for expenses deductible under the Schedule E rules, plus contributions to approved pension schemes, plus the employer’s NI both on the deemed salary and on actual salary payments, plus 5% of the gross Sch E type income to ‘cover’ the company’s running costs.
The rules seem to be targeted at Limited Companies and partnerships and not sole traders, but such contracts for individuals are rare given the existing proposals that caused people to move into service companies in the first place.
Whether or not these regulations are fair, or even legal, is still in debate in some quarters. The owners of most ‘one person’ companies can still take their money out by way of dividend rather than salary, but a similar legal entity that happens to be supplying a certain service cannot. It may be the first time that like companies have been treated differently in law – and on what legal authority?
Even more discriminatory is the fact that owners of service companies are subject to all the burdens of PAYE without any of the benefits such as holiday pay, sickness benefit, unemployment benefit, and so on. Partly this derives from the fact that the government is way behind the times in understanding the impact of modern technology allowing outsourcing, home-based working and so on.