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IR35 explained



What is it?

In March 1999 the Government announced measures to counter the avoidance of income tax and national insurance contributions (NICs) through the use of personal service companies (PSCs). Issued in late 1999, and known as the IR35 proposals, these new rules take effect from 6 April 2000.

What loophole will the proposals plug?

The perceived tax avoidance scheme the Chancellor had in mind when he launched the IR35 proposals involved a person using PSCs to enter into engagements with a client for the provision of his or her services. By using a PSC, a contractor could enjoy certain tax advantage, namely not being charged PAYE and NICs on fees; being paid through dividends rather than under Schedule E salaries (thereby avoiding NIC); and having allowable business expenses determined under the less restrictive rules for companies.

Application of the new rules

The rules will apply to engagements where a person provides services under a contract between a client and an intermediary PSC and, but for the PSC, the income from these services would have been treated as coming their Schedule E employment. In other words, PSCs will be regarded as transparent when defining the nature of a task performed by a contractor. The rules differentiating employment and self-employment are unchanged.

Implications for the IT director

Happily, this week's column is more of a Stand Easy Call. The original proposals would have required the client to deduct PAYE and NIC from the amounts invoiced by the PSC. These proposals were heavily criticised and there was a fear that the UK economy would face a collapse of the contracting market. The Government responded by altering the terms of IR35 so that the PSC, and not the client, must now decide whether to operate PAYE and NIC. So, insofar as the client company is concerned, the administrative and cash flow implications of the original IR35 proposals have been dropped.

For further details contact Michael McCormack of Dibb Lupton Alsop's Corporate Tax team on 08457 262728


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