A limited company can be a very tax efficient trading vehicle. However, it is an option that is only intended for bona fide contractors, which is why HMRC introduced two pieces of tax legislation to tackle perceived abuse of limited company status: IR35 and the settlements legislation.
What is IR35?
IR35 – sometimes referred to as the off-payroll working rules – is legislation designed to identify contractors who would be considered an employee of their end client if it weren’t for the existence of an intermediary (i.e. their limited company).
When a contractor is deemed ‘caught by IR35’, all of their income for that contract becomes subject to employment taxes. They are also required to pay employer’s NI through their limited company. This typically results in a net loss of earnings of roughly 25%, in addition to potential interest and penalties.
In the private sector, contractors are responsible for assessing their IR35 status and taxing themselves accordingly. In the public sector, the end client and contracting agency assume this responsibility, which creates further problems.
IR35 is considered by many as the single greatest threat to contractors. Its ambiguity means a contractor can easily and unwittingly become caught by the legislation, which is why it is essential to tackle it only with the assistance of a specialist contractor accountant.
What is The Settlements Legislation?
The settlements legislation applies when someone other than the limited company’s main fee earner receives income from the company. When this happens, the sum allocated to the non-earning partner could be treated as the fee-earning contractor’s income for tax purposes, adding to their tax bill. HMRC can also backdate assessments by as many as six years, with penalties and interest added to this potentially huge sum in back taxes.
In certain circumstances, splitting income between partners to reduce tax liabilities is a perfectly legitimate tax planning strategy, although specialist guidance is key to guaranteeing compliance.
How can we help – compliant tax planning and advice
There is sometimes a thin line between legitimate tax-efficiencies and tax avoidance. Fortunately, our experts know IR35 and the settlements legislation inside out, and can help you eliminate their risk. We are experts at deciphering the tax rules and regulations, and explaining how to avoid the common mistakes that lead to HMRC investigations.
Most importantly, we can provide what our contractor clients need most of all:
• Clear explanations
• Creative, yet compliant, interpretations
• Sound advice resulting in tax savings.
Our specialist advisers have helped hundreds of contractors achieve maximum tax-efficiencies whilst staying within the letter of the law. For more advice on IR35 and the settlements legislation, please speak to one of our experts on +44(0)330 024 3200.