Working Via A Personal Service Company – Where Are We Now?

Mark Twain said: “There are two kinds of statistics, the kind you look up and the kind you make up.” 

Statistics published by HMRC are always the former as they cannot be permitted to be the latter. A classic example is to be found in the statistics covering IR35. Before detailing the statistics, here is a brief reminder of the IR35 rules.

‘IR35’ was introduced with a view to reducing perceived tax avoidance, particularly by personal service companies (PSC). The rules cover the situation where any worker (even those purporting to be self-employed) receives payments from a client, but would otherwise have been an employee of the client had the intermediary not existed – this is termed ‘disguised employment’. 

The IR35 rules were first introduced in March 1999, coming into force in May 2000 (as FA 2000, Sch 12). The legislation has since been consolidated (into ITEPA 2003, Pt 2, Ch 8, and the Social Security Contributions (Intermediaries) Regulations 2000, SI 2000/727).

Statistics do not exist for the years pre-2006, but it is known that for 2006/07 the number of HMRC enquiries stood at 158, yielding £1.9 million. Three years later, that number had fallen to 12 enquiries, with a yield of £155,000. When the Conservatives came into office in 2010, the Office of Tax Simplification was created and tasked with (among other things) a review of IR35 and its workings. The review concluded that IR35 should either be suspended, with a view to being abolished, or retained, but with ‘improved administration’. The government chose the latter, and an ‘IR35 Forum’ was formed with the remit to monitor the changes. The ‘improvements’ culminated in a direct increase (by 433%) in the number of new enquiries for 2012/13 to 253, yielding £1.1 million. 

IR35 status is largely dependent on three criteria, and as such it is important to ensure that the contract (and conduct whilst undertaking the contract) between the contractor/worker and the end company contains each of the following:

The contractor should not be contracted personally to do the work, sending a substitute in case of absence. Ideally no permission needs to be sought before sending the substitute. 

A genuine contractor should be able to decide how the work is undertaken rather than the client, so autonomy and independence in the relationship is vital.

This should not exist within the relationship. The contractor must be under no obligation to do work outside of that stated in the contract and conversely, the client is not obliged to provide additional work, unlike in a traditional employee/ employer contract situation.

If subject to IR35, the rules require the calculation of the ‘deemed salary’ being  95% of the income from relevant engagements after deducting expenses that would normally be allowable under a usual PAYE contract (i.e. travel to clients premises from the company base, subsistence, training costs, capital allowances, pension contributions, actual salary taken and NIC). 

The notional ‘deemed salary’ tax payment is normally made at the end of the tax year (or end of the contract, whichever comes first) with the payment being deducted from any corporation tax levied on the company.

Abolition of HMRC’s online ‘Business entity tests’ 

In May 2012, HMRC published 12 online test questions designed to indicate the level of risk of an IR35 investigation. Each question attracted a given weighting and, depending on the answers and resulting score, contractors would be assigned a risk category (i.e. high, medium or low).

However, it became clear that these tests were of little use, particularly to PSCs because most fell within the ‘high risk’ band. In addition, it was found that the tests were being abused, with various websites springing up offering (for example) to rent virtual offices and other additions for a fee, to gain a ‘low risk’ score. 

Following the final review made by the IR35 Forum in January 2015, the business entity tests have been abolished with effect from April 2015, after only three years of being in place.

Abuse of the rules is also the reason why the government is intending to no longer permit all those working via intermediaries to claim a tax deduction for the cost of travelling to clients’ premises. This is usually the largest expense incurred and if the proposals become law they will increase the amount of tax payable. 

The proposals were initially targeted at people who work via certain employment agencies and ‘umbrella’ companies whose workers were being found to abuse the rules by claiming tax relief on travel to temporary workplaces. The 2014 Autumn Statement announced the issue of a consultation paper on this subject headed ‘Employment intermediaries: Temporary workers – relief for travel and expenses’. The detailed findings are still awaited. but those who have responded to the consultation have recently received a letter stating:

“The proposals announced are different from those included in the discussion document released in December 2014 and reflect the feedback and evidence HMRC received in response to that document.

The current proposal will remove workers’ entitlement to claim tax relief for travel and subsistence for their home to place of work where:

In other words, the rules will not only apply to those working via agencies or ‘umbrella companies’ but also those working via PSC’s.

The IR35 Forum also suggested the creation of a ‘HMRC contracts review’ service which has now been set up. Under this service, HMRC will review a written contract for you. The review relates to current contracts rather than future ones, the danger being that use of this service could lead to an IR35 enquiry going back some years if the rules were found to apply. 

However, further IR35 statistics show that the service cannot be said to be cost–effective. For 2012/13, HMRC received 80 contract review requests, of which they gave an opinion on 12. Of those opinions, only two were considered to be ‘caught’ by IR35. For 2013/14, the service received 64 requests, of which they gave an opinion on 16, and again only two were considered to be ‘caught’.

The revised travel expenses proposals mean that the criteria rules take on another level of importance to anyone working via a PSC who might be ‘caught’ under the IR35 rules. 

As such, it is now more important than ever to have the work contract reviewed by an independent adviser to ensure that the PSC is effective. However, looking at the IR35 statistics as a whole it could be said that the likelihood of being ‘caught’ is slim, but there again the reason for the low number of enquiries could be as a result of contracts being written and conducted correctly.