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IR35 Accounts or Contract Service Company

Being a contractor providing services for other companies and preparing contract service company accounts has many benefits but can also give many challenges.  First of all you need to decide which legal form you should adopt whether it is a sole trader, partnership, Limited Company or PAYE Umbrella.

 

Freelance Contractors should protect themselves from HMRC attacking their Tax Status by appointing a Tax Accountant to prepare their contract service company accounts.

 

Contained in contract service company accounts for a personal service company will pay dividends to the owner and worker net of 20% corporation tax and no National Insurance due by either the company or the worker and owner.  The ‘IR35’ rules are designed to prevent the avoidance of tax and national insurance contributions (NICs) through the use of personal service companies and partnerships.

 

The rules do not stop individuals selling their services through either their own personal companies or a partnership. However, they do seek to remove any possible tax advantages from doing so.

 

Summary of Approach

 

Removal of tax advantages

The tax advantages mainly arise by extracting the net taxable profits of the company by way of dividend. This avoids any NICs which would generally have been due if that profit had been extracted by way of remuneration or bonus.

 

The intention of the rules is to tax most of the income of the company as if it were salary of the person doing the work.

 

To whom does it apply?

 

The rules apply if an individual sells his or her services directly through a company (or partnership), and the work relationship would be classed (by HMRC) as employed rather than self-employed.

 

For example, an individual operating through a personal service company but with only one customer for whom he/she effectively works full-time is likely to be caught by the rules. On the other hand, an individual providing similar services to many customers is far less likely to be affected.

 

Planning consequences

 

The main points to consider if you are caught by the legislation are:

  • the broad effect of the legislation will be to charge the income of the company to NICs and income tax, at personal tax rates rather than corporate tax rates
  • there may be little difference to your net income whether you operate as a company or as an individual
  • to the extent you have a choice in the matter, do you want to continue to operate through a company?
  • if the client requires you to continue as a limited company, can you negotiate with the client for increased fees?
  • if you continue as a limited company you need to look at the future company income and expenses to ensure that you will not suffer more taxation than you need to.

The last point is considered in more detail below.

 

Employment v self-employment

 

One of the major issues under the rules is to establish whether particular relationships or contracts are caught. This is because the dividing line between employment and self-employment has always been a fine one.

 

All of the factors will be considered, but overall it is the intention and reality of the relationship that matters.

 

The table below sets out the factors which are relevant to the decision

 

How we can help

 

If you would like to discuss any of the above please contact KRA by entering your details below we can arrange a No obligation FREE initial meeting at your premises or our office to carry out a business review.

If you are interested in instructing us we will offer you a FIXED FEE accountancy service with no hourly charges or hidden costs.

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