Its long been a bone of contention with HMRC that they have been losing tax revenue by individuals who should be staff but operate out of a Limited company, generally known as a Personal Service Company (PSC), to reduce the tax which they are liable for by taking advantage of the Company status. To combat this HMRC introduced legislation known as IR35 back in April 2000 with anyone being deemed to be an employed treated in a similar way to employees with tax and NI deducted from their fee.
Unfortunately the definitions which separated deemed employees from contractors were a little muddy and often lead to uncertainty, with HMRC withdrawing the formal guidance notes that they had published.
Recent changes have seen a significant shift by HMRC to clarify their stance, having recently introduced two significant elements to the equation via the introduction of a testing tool which they have said they will stand by (unless the information supplied was incorrect), and through formal legislation requiring public authorities and public bodies to test all service suppliers for IR35.
So who is affected?
So far it seems that HMRC have applied the new rules like a blanket to all their government contractors leading to widespread departures from IT experts working on HMRC projects in particular. However, the rules have significant implications for individual businesses with any formal office holder (i.e. company director, secretary or board member) being automatically classified as employees regardless of any other standing. Other tests to decide the status of contractors vs. employees include (but are not limited to) the ability to provide a substitute person, to dictate elements of how, when and where the contract is performed and if there is a supply or goods or equipment by the contractor.
To check to see if you potentially fall foul of the IR35 rules you can review the HMRC guidance or use the testing tool on one of the webpages that follow or by contacting a member of the summ.it team.
HMRC Testing tool