Limited company contractor hirers should be aware of IR35

Company owners are urged to clear on their use of ‘self employed’ workers, as the tax treatment of ‘disguised employees’ continues to receive media attention.

A professional advice website, unbiased.co.uk, says that business owners can save on their National Insurance liabilities by hiring the services of limited company contractors rather than recruiting permanent members of staff.

In fact, the advice site’s ‘Tax Action Report’ suggests that small businesses could save a combined total of £2bn per year by following this route, as such individuals are paid for on a business to business basis rather than via PAYE.

Business owners should be aware of the IR35 rules

However, in the current climate, businesses owners are being urged to seek professional advice to ensure they are up-to-date with the relevant tax rules, particularly IR35.

IR35 was implemented in 2000 to ensure that ‘disguised employees’ are taxed in a similar was to traditional employees. HMRC took action particularly against employees who would leave permanent employment one day, only to be re-hired as a consultant working via their own limited company.

If such workers are found to be ‘employees’ rather than ‘self employed’ people, they will have to pay NICs and income tax on their entire business income (known as a ‘deemed payment’), following a fixed 5% deduction for administration expenses.

However, the report points out that business users of limited company contractors could also be investigated by HMRC if they are found to be encouraging tax avoidance by utilising the services of limited company consultants who are ‘disguised employees’ purely to save on their National Insurance bills.

New controlling person proposals

Business owners (particularly of larger companies) should also be aware of new Government ‘controlling persons’ proposals that would force hirers of interim consultants using their own limited companies to pay such experts via the payroll if they are caught by the proposed rules.

If the proposals go ahead following a consultation period that ends on August 16th 2012, this could result in higher tax bills, and potential employment law obligations for host companies if interims are forced to become ‘employees’ rather than ‘self employed’ individuals.

Could you benefit from professional advice?

Unsurprisingly, the report’s authors suggest that business owners seek the advice of an accountant and/or IFA to make sure they make the most of available tax breaks, and “make sure you are not crossing the line into tax evasion.”