Legislation and Taxation

Freelance Contracting operates within a complex environment of legislation and taxation.

New rules and regulations are often introduced by Government without any apparent understanding of the contracting market. This causes both uncertainty and unintended consequences. The industry has to wait for case law in order to clarify how the legislation should be interpreted. The introduction in 2000 of IR35 regulation is a prime example of poor legislation, with the 2010 introduction of the Agency Workers Regulations continuing the trend.

OrangeGenie regards compliance with legislation and taxation as critical to the long term survival of both the company, our clients and customers, and our contractors. The consequence of non-compliance can result in substantial fines and penalties. 

OrangeGenie takes a conservative low risk attitude to new regulation, we always make ourselves available to discuss compliance.

The following list covers some of the more important issues in determining which operating method to choose and how to conduct your business going forward:

IR35, also known as the Intermediaries Legisltion is concerned with employment status (employed or self-employed) for tax and national insurance purposes.

At its most basic, IR35 looks to remove the contractors own limited company and the agency from the picture. The legislation is concerned with the contractors relationship as an individual with the end client.

To be inside IR35 means that the relationship is effectively disguised employment and you will have to pay employed levels of tax and NIC on your income.

To be outside IR35 you are regarded as being genuinely in business and free to account for tax and nic on you income through your own company.

The net result is that being inside IR35 usually costs you more!

You may issue shares in your company to anyone you choose. All shareholders are entitled to recieve dividend income from post-tax profits of the company in the same ratio as the shares owned. Since dividends represent a tax efficient method of withdrawing funds from a company. 

Legislation known as Section 660 was created specifically to prevent a high earner from 'settling' income onto a family member, usually for the purpose of avoding tax.

If the spouse, or partner, is a director of the company and they play a significant role in the business then their status as a shareholder is of less concern. The shareholder and director who is not the main fee earner should hold a clearly identifiable role in the company to justify earning dividends. 

Introduced in 2007, MSC legislation 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.

The legislation seeks to close a tax loophole used to avoid IR35 legislation by setting out rules to assess a contractor's limited company status and the status (or 'involvement') any third party provider.    

A Managed Service Company will exist where a scheme provider promotes the use of a personal service company and provides the structure to contractors. The contractor (although a shareholder) does not exercise full control over the company.

Where a managed service company exists all payments made to the contractor must be subject to emloyment tax. This means that PAYE and NICs must be applied to all income.