What are 'IR35' and a Public Service Companies
IR35 is the number of a press release issued on 9th March 1999 following the Chancellors Budget Day announcement of measures to combat tax avoidance. The subsequent legislation is now commonly known as 'IR35'. The purpose of the legislation, in its simplest form, is to make it less financially attractive for an employee to form a partnership or company, be employed or receive payments by or from the new company and to have that company contracted to do the same job as when employed.
Prior to 6th April 2000 a personal service company could be set up to provide the services of a single worker to a client in circumstances where, if the service company did not exist, the worker would be an employee of the client. The use of service companies in this way allowed the client to make payments to the company rather than the individual, without deducting PAYE or National Insurance Contributions (NIC's).
The worker could then take money out of the service company in the form of dividends instead of salary. Dividends are not liable to NIC's so the worker could pay less in NIC's than either a conventional employee or a self-employed person. The individual thus gained an unfair advantage over other employees. There were also tax advantages.
The above highlighted paragraphs are the Inland Revenues' official press released view of what a PSC is, and it is a sweeping and slightly bias interpretation. There are many other considerations that also need to be taken into account to come to a more balanced decision, however, the final decision will always lie with the Inland Revenue.
Via the Finance Act 2003 the intermediary (IR35) legislation is amended to apply to engagements where a worker personally performs, or is under obligation to perform, services for the client. As a result, work performed personally for the client is brought into scope of the legislation, not just work performed for the client's business. The change applies to services performed on or after 10 April 2003.
Test to see if you are a Public Service Company
If you fall within the general PSC test above then you need to look at each contract, client or job individually. The ruling judges each engagement separately, so you can have many different clients and still be classed as a PSC, however, if your are a PSC on one 'job' it does not mean you are always a PSC. The circumstances of each client's 'job' may change and affect the IR35 status. The whole object of IR35 is to classify a person as either employed or self employed, so the questions that need to asked yourself are the one's that will prove you to be self employed.
For instance, do you provide your own equipment and have the ability to hire workers to do the work, make a financial loss as a result of a mistake you made and risk your own money in the business, are you paid by the job. If most of these questions can be answered Yes then you would, in general, be classed as self employed and not caught by the IR35 rule.
However, if on the other hand you are paid by time periods for set hours and receive instructions as to how you work and this work is carried out on the clients premises and you are not allowed to appoint anyone else to do it for you then you will, in general, be classed as employed and caught by the IR35 rule.
As with most area's of this type of legislation it is not as simple as it seems. It is very complex and we suggest advise be taken before coming to a decision. To help you, the Inland Revenue has a service that looks at the circumstances of your current or past jobs and will give their opinion (see note above) of whether it falls within the scope of the legislation.
