There are a variety of different ways in which people can provide their labour to a third party. Much of the time, the individual enters into the contract of employment with their employer and becomes an employee. However, sometimes people provide their labour in a variety of other ways. For example, in certain industries and sectors, it has become quite common for people to set up their own limited company (often called a ‘personal service company’) and provide their services via that company. Whilst this can be a perfectly legitimate way to do business, it can also cause problems from both a tax and an employment law point of view.
Over the years, HM Revenue & Customs has become increasingly concerned about arrangements which look suspiciously like employment, yet where the alleged ‘employee’ is providing his or her services via a ‘personal service company’, invoicing the ‘employer’ for those services and paying less income tax and NICs 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 appropriately.
If businesses and individuals are wrongly structuring and categorising the way in which an individual provides his or her services, they could be hit with a fairly hefty tax bill.
Until recently, the tax risks arising out of the IR35 regime primarily sat with personal service company itself. However, in April 2017, new laws were brought into force, requiring public sector bodies to identify arrangements involving ‘personal service companies’ and effectively apply normal employment taxes to 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 with effect from April 2020. One of our contacts in the accountancy profession recently brought to our attention a plea from the Association of Chartered Certified Accountants (ACCA), requesting a one-year delay to the introduction of these new obligations. The ACCA feels that employers need more time to get to grips with the new rules, before they are under an obligation to comply.
We will need to wait and see whether the government is listening. Either way, now might be a good time for you to review your arrangements and assess the risks. Please get in touch if you need a helping hand.