In the ever-evolving landscape of taxation, staying informed about legislative changes is crucial for businesses to ensure compliance. One such significant change introduced by HMRC is the anti-avoidance legislation targeting personal service companies, commonly referred to as “IR35” and more recently as “off-payroll working” rules.
Personal Service Companies (PSCs)
A Personal Service Company is a limited company set up by an individual to provide services to a client through an intermediary, rather than entering into a direct employment contract with the client. These owner-managed businesses are still relevant for corporation tax, and it’s essential for directors of such companies to be aware of the implications of the off-payroll working rules.
When the Rules Apply
HMRC scrutinises the nature of the relationship between the individual worker and the client to determine if the arrangement would be different without the intermediary company. If the individual would be considered an employee without the company, the entity is classified as a Personal Service Company, and the anti-avoidance legislation comes into play.
Small or Medium/Large Client Distinction
Recent changes in HMRC rules have shifted the responsibility for determining the applicability of off-payroll working rules. For medium or large clients, the onus is on the client to decide whether the rules apply. In contrast, for small clients, the responsibility falls on the Personal Service Company to make this determination.
Services Provided to a Small Client
When providing services to a small client, the PSC is responsible for assessing whether the rules apply. Only ‘relevant engagements,’ contracts that would be considered employment without the intermediary PSC, are subject to these rules. If no relevant engagements are identified, normal tax rules apply to company profits and profit extraction by the director.
If the PSC determines that some contracts are relevant engagements, it must:
- Treat income from those engagements as if paid as a salary to the individual worker.
- Account for notional income tax and National Insurance Contributions (NICs) on that salary by April 19 following the end of the tax year.
Services Provided to a Medium/Large Client
When services are rendered to a medium or large client through an intermediary, the responsibility shifts to the client to determine if the worker would be considered an employee without the intermediary company’s involvement.
For comprehensive information tailored to your specific situation, contact TaxDigit today. Our expert team is well-versed in the intricacies of off-payroll working rules and can provide personalised guidance to ensure compliance and mitigate potential risks. Don’t navigate these complex regulations alone – let TaxDigit be your trusted partner in tax compliance.
