Probably the question I've most frequently been asked recently is a variant on 'IR35 - what's going to happen?'. The picture is now becoming clearer.
Those readers who have not spent the past 7 months on Mars will be aware that IR35 was a Budget Press Release in March 1999, in which the government, against the background of political platitudes such as 'making sure that everyone pays their fair share', declared (in effect) that it was so impressed with the way the contracting industry had developed in this country that it wanted to move the goalposts, so as to allow it to milk a total of some £500,000,000 in extra taxes and NI annually, which it could then squander for its own purposes after the fashion of governments everywhere!
The Golden Rule 'if it works, don't fix it' would thereby have been broken, and (as initially presented) the proposals made fundamental changes, which could well have destroyed the entire contracting industry. Extensive lobbying by various groups representing different aspects of the industry has now resulted in various changes to the proposed legislation; the details will not be finalised or published until the new year, but at least the following points are now becoming clear:
Until now, Contractors have been able to choose
From April 2000, each Contractor will have to take a decision as to the tax treatment of each contract; and that's a decision it will be important to get right - advice will need to be taken, and it's understood that a process for getting a ruling from the Revenue on that question will be put in place (I wonder if they realise just how busy that service will become?).
The tax treatment of each contract will, broadly speaking, depend on the answer to this question: if the (Contractor's) company wasn't 'in the middle', would the contract (as a matter of law) be an 'employment contract', or a contract for services? The answer to this question will largely be found by looking at the terms of the contract itself, and applying existing legal rules to it. More on that in a later article.
If the answer to the above question is 'not employment, but contract for services', then the income continues to form part of the general income of the Company, and the tax treatment of it will remain exactly as before.
If on the other hand the answer is that the contract would be 'employment', then by the end of the tax year, such of the income from that contract as has not been dealt with under 1 2 3 and 5 above, after deduction of employer's NI, and a further 5% of the contract income against general overhead expenses, will suffer tax and NI as if it had been paid to you as salary. The money may then either be paid out to you, or retained in the company, where it may be paid out to you without further deduction of tax at a later point.
The big changes therefore are (1) that item 4 above goes - you lose the freedom to set expenses of other business ventures of the company against the tax due in respect of this contract; (2) you lose the freedom to pay dividends without incurring an NI liability; and (3) all the income from the contract (subject to the minor points above) is treated as yours - you lose the freedom to allocate some to a partner in order to keep yourself at lower tax rates.
More detailed rules will be available as time passes; meanwhile, the prudent Contractor will (1) keep his/her limited company structure, and (2) avoid becoming locked into a contract which (s)he cannot terminate before April 2000, so as to retain some negotiating strength in order to change contract terms, should that be felt necessary.
1st October 1999
I'd really appreciate your feedback on this FAQ - so mail me and tell me what you think of it, if it's been useful to you, or let me know of any specific problem you have where I may be able to help.
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