Tax Planning

The question of IR35 is one that affects all contractors but often leaves them bemused and wondering how it applies to them. The legislation does not outlaw contractors trading through Limited Companies but it does apply a special tax calculation and liability on any contractor trading through this route in certain circumstances, where a contractor’s skills are deemed to be provided in a way that reflects an employment relationship. If caught by the legislation you will pay more tax and NIC.

We can provide further guidance on IR35 but your status has to be a decision that you make. Contracts and working practices are areas that generally need to be examined by an independent person with specific legal expertise in this area. The determination of IR35 status falls outside of the scope of the work undertaken by Orange Genie but we do recommend a firm of specialists who are legal experts in this field. They will examine your contract and then report back their findings leaving you secure in the knowledge that you are operating outside of the legislation.

IR35 Legislation sought to tax contractors as employees if their relationship with their end client was deemed to be one of employment. Contractors operating outside of IR35 then began to trade through Limited Companies that they themselves did not manage. MSC legislation introduced in 2007 is intended to remove any tax advantages a contractor may benefit from if they are not are not genuinely in business in their own right and do not fully control all aspects of their company.

Where the MSC legislation bites all payments made to the contractor must be subject to employment tax. This means that PAYE and NICs must be applied to all income. It is therefore important that you control and run your own business although OrangeGenie will be here to guide and assist as much as possible.

The Settlements Legislation, more commonly known as Income Shifting Legislation seeks to ensure that an individual cannot gain a tax advantage by making arrangements to divert their income (or a portion of it) on to a third party who is liable to pay tax at a lower marginal rate. The implications of the legislation are quite simple in theory. If there has been a transfer caught by the S660 then the transferor will be assessed on the value of if the income given away as if they had retained the income themselves.

In practice the situation has become complex. The Arctic Systems case saw a husband and wife owning 50% of the company, whilst only Mr Jones generated income. Both parties received dividends. HMRC argued that a settlement had been created on the basis that the shares owned by Mrs Jones were an arrangement to reduce the family tax burden rather than a transaction made at arms length. The basis of their argument was that Mr Jones would never have agreed to a complete stranger owning half of the business for £1 and so the arrangement was viewed as being bounteous.

The House of Lords finally judged that there had been a Settlement between Mr & Mrs Jones but that they were entitled to claim the inter spousal exemption and hence Mr Jones was not liable for the additional tax. The case sets the precedent that a 50/50 share split in a husband and wife Company will be allowable in situations that mirror the facts in the Arctic Case.

However, caution should be taken when deciding how to structure the shares in your Company. HMRC have said that they will review cases where they deem the facts of the situation to be distinguishable from the Arctic case and they will seek to review any arrangements whereby income is earned by a party that does not contribute to the Company income. Call us to discuss your circumstances on 0845 055 7055.