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Contractors and IR35? 17/05/12

Recent television and newspaper headlines have been full of stories relating to 2000 Senior Civil Servants who are using companies to avoid or mitigate tax.

Who are they and do they exist?

The recommendation is that everyone taken on for more than six months should go on the payroll (not, you notice, that they should have IR35 status checks, though that would seem the correct way to proceed). It seems that some 40% have been in place for more than two years (though whether on single contracts or repeated short ones we do not know).
Much was made of the difficulty of breaking contracts, but surely all departments have to do is ask HMRC for an IR35 ruling. And if – as many of them may be – they are office holders, there is no question but that they ought to be on PAYE.
The main areas where anomalies may occur are in departments such as defence, BIS (Department for Business, Innovation and Skills) and food and agriculture. The NHS was also mentioned: it may be necessary to point out that GPs and dentists working in the NHS are not employees at all, but self employed, and that for them limited companies have been used ever since their professional bodies allowed them to do so.
Most of them, we could assume, are contractors on short term contracts and not career Civil Servants, and it is a fact that some government departments insist on taking them on through companies to avoid creating employment rights.

What is an IR35?
An IR35 is a piece of Tax Legislation (introduced on 6th April 2000) designed 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

Tonmoy Kumar, Manager of the Accounts and Payroll Department of ABDS says:

“Before IR35 was introduced workers who owned their own companies were allowed to receive payments from clients direct to the company and to use the company revenue as would any small company. Company profits could be distributed as dividends, which are not subject to National Insurance payments. Workers could also save tax by splitting ownership of the company with family members in order to place income in lower tax bands.”

A new set of questions have been introduced by HMRC on May 1 2012
See www.hmrc.gov.uk/ir35/guidance.pdf

If you need any help and advice for your business on Payroll and National Insurance, contact Lavinia Newman, Stuart Coleman or Tonmoy Kumar to discuss how ABDS can help

ABDS Chartered Certified Accountants of Southampton.
Tel: 023 8083 6900  E-mail: abds@netaccountants.net

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