WORKING IN THE UK - Page 3/4
Working In The UK - VISAS
Are 'composite' and 'umbrella' companies affected?
The IR has also said the legislation does apply to people working through 'composite' or 'umbrella' companies. These are companies, which have been set up by third parties whereby the contractor is not necessarily a director of the company but is an employee and shareholder of that company and is paid in dividends. The third parties who set up these companies will generally charge a fee and can be responsible for administration/bookkeeping for the contractors. In most of these cases, contractors are indemnified by the company against any claim which might be found against them and in favour of the Inland Revenue.
Consequences of failing to follow the new rules
If the IR discovers a case where the new rules have not been followed, they will do as they normally do in case of PAYE/NICs failure, which is to seek to collect any unpaid tax or NICs and any interest due. In addition penalties may be sought in cases of negligent or fraudulent conduct.
In simple terms, this means that if the services supplied via your limited company fail the IR35 tests, then all the monies earned from that particular assignment may be subject to full PAYE plus fines.
In a tax regime based around self-assessment, it is important to understand where your contracts stand.
The IR Compliance Officers will decide which assignment contracts pass or fail the IR35 test of 'employed vs self-employed'.
The tests for whether a contract is 'deemed employment' are described below. The tests are not black and white and require company directors to consider a number of factors in the working relationship with the end client.
Factors to be considered for deemed employment - questions and answers
Q: Does the client exercise an element of control over the individual?
(Can someone tell you at any time what to do, or when and how to do it?)
A: An individual is more likely to be in employment if there is a right to exercise "control" over the individual.
Q: Does the contract allow the right to substitute an individual?
(Do you yourself have to do the work rather than hire someone else to do it for you?)
A: Where there is no right to substitute the individual undertaking an assignment then the contract is likely to be one of employment.
Q: Does the contractor company take financial risk?
(Do you risk your own money in the business and are your responsible for meeting the losses as well as taking the profits?)
A: Substantial investment in skills training and provision of equipment, software and other tools of the trade, the opportunity to profit from organising work effectively and taking financial risk in undertaking an assignment (such as being responsible for remedy, errors in software produced) are pointers to self-employment.
Q: What is the basis of payment?
(Are you paid by the hour, week or month?)
A: Payments for producing an agreed output are features of the self-employed. Payment by an hourly, weekly or monthly rate, for a specified time, with significant control exercised by the client is a pointer towards employment status.