Back in August 2019, we reported on the planned introduction of a stricter regime for regulating the use of ‘personal service companies’. These changes were delayed as a result of COVID-19, but it now appears likely they will come into force on 6th April 2021.
What’s it all about?
For many years now HM Revenue & Customs has been concerned about arrangements which look suspiciously like employment, yet where the alleged ‘employee’ is providing their services via a ‘personal service company’, invoicing the ‘employer’ for those services and paying less tax as a result. To counter the perceived problem, HMRC created the so-called ‘IR35’ regime. At its heart, this regime is intended to ensure that relationships which ought correctly to be categorised as employment are identified and taxed accordingly.
Under the IR35 regime, if businesses and individuals have wrongly structured and categorised the way in which an individual provides their services, they can be hit with a hefty retrospective tax bill.
Who shoulders the risk?
Until recently, the tax risks arising out of the IR35 regime primarily sat with personal service companies themselves. However, in April 2017, new laws were brought into force, requiring public sector bodies to identify arrangements involving ‘personal service companies’ and, where appropriate, deduct normal employment taxes from any payments made to those companies.
More recently, the Government has indicated an intention to extend this obligation to medium and large companies in the private sector as well. In simple terms, these companies will be obliged to undertake a ‘status determination’ to work out whether any person providing their service via a limited company ought to be treated as an employee for tax purposes. Where companies fail to comply with their new obligations, they can find themselves lumbered with the obligation to pay any outstanding tax.
Any action required?
If you have not already done so, you ought to consider whether these new obligations could apply to you. Will you be regarded as a medium or large-sized business for these purposes? Do you currently have any arrangements in place whereby you engage the services of individuals (e.g. contractors, consultants and the like) through their own companies? If the answer to both these questions in ‘yes’, then there is most certainly some further work to be done.
If you need to know more, please get in touch with our team and let us lend a helping hand.