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Contractors Tax 2009

27 February, 2009

While many companies are down-sizing due to the recession, one has to speculate on what lies ahead for the contractor and whether he will be able to weather the storm. However, it must be remembered that jobs still need to be completed and the hiring of contractors on a project basis will be highly favoured in the current economy.

Some 10 years from the introduction of IR35 contractors still feel that it is one of the most ill conceived tax laws and that they suffer from its liability. The Professional Contractors Group, established in 1999, continue to lobby for its abolition.

The HMRC will continue to enforce compliance and IR35 will play a key role for IT contractors in 2009. The HMRC also believes that IR35 defines the roles of the tax office clearly and will lead to a better relationship between the organisation and the taxpayer.

What is IR35?

The Intermediaries legislation was introduced on 6th April 2000. It was first proposed by the Chancellor in the 1999 Budget and details were given in the Budget press release numbered IR35. Following extensive consultation, revised proposals were announced in a new press release dated 23 September 1999. However, the legislation is now commonly referred to as ‘IR35’.

The aim of the legislation is 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
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  • For NICs purposes, be regarded as employed in employed earner’s employment by the client

Prior to the introduction of the legislation, an individual could avoid being taxed as an employee on payments for services and paying Class 1 NIC by providing those services through an intermediary. The worker could take the money out of the intermediary, normally a Personal Service Company, in the form of dividends instead of salary. As dividends are not liable to NICs, the use of a dividend remuneration strategy results in the worker paying less in NICs than either a conventional employee or a self-employed person. And PAYE would not apply to the dividends.

The legislation ensures that, if the relationship between the worker and the client would have been one of employment had it not been for an intermediary the worker pays broadly tax and NICs on a basis which is fair in relation to what an employee of the client would pay.

The circumstances in which the legislation applies:

If you provide your services to a client (the end-user) via an intermediary, typically a service company or partnership, and the intermediary does not meet the definition of a Managed Service Company, then the IR35 legislation may apply to engagements with that client.

Broadly, it applies to those engagements where –

     
  • you personally perform services for another person (the client);
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  • the services are provided not directly with the client but under arrangements involving an intermediary; and
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  • the circumstances are such that, if you had provided the services directly to the client under a contract between you and the client, you would have been regarded for income tax purposes as an employee of the client and/or, for NICs purposes, as employed in employed earner’s employment by the client.

In addition you must receive or have rights entitling you to receive a payment or benefit that is not employment income. The intermediary must also satisfy certain conditions.

The HMRC has recently proved how far it will go in order to penalise non-compliance with the Larkstar Data legal battle and IT contractors will need to take careful note of the rules and regulations of the IT35 system to avoid problems at a later stage.

 

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