IR35 - in words of 1 syllable please :)

[numtumfutunch]

Hi

Im employed and salaried full time and do some freelance work in my own hours earning an extra 20% approx of my salary
The work is piecemeal and would involve writing reports or spending days on site at various other agencies

Most of us in my job do this and theres a 50:50 split between those of us with a cautious approach to tax evasion and the chancers who have set themselves up as a PLC for this extra work

Over the years I am not aware of anyone ever being taken to task by HMRC for this and now Im wondering if my moral high ground is misplaced and paying top rate tax just plain naive

Ive read lots on IR35 and just cant see how paying my fee from a subcontractor into a PLC would keep the revenue happy

Comments welcome

Thanks

[Alex]

IR35 only applies if you are working through your own Limited personal services company.

[Eric Mc]

Or any form of "intermediary" i.e. a partnership, an LLP OR a limited company.

It does not apply to a self employed individual.

[numtumfutunch]

Thanks, thats exactly my confusion

A number of colleagues have set up a PLC with them as the only shareholder and employee, and then they freelance/consult and get this pay put into the PLC

I hadnt thought it 100% legit but I know of nobody who has ever been investigated

[Eric Mc]

numtumfutunch said:

Thanks, thats exactly my confusion

A number of colleagues have set up a PLC with them as the only shareholder and employee, and then they freelance/consult and get this pay put into the PLC

I hadnt thought it 100% legit but I know of nobody who has ever been investigated

Firstly, I doubt very much that ANY of your colleagues have set up PLCs. PLC stands for Public Limited Company i.e. a company who's shares are quoted on the stock exchange.

I think you will find that they have set up private limited companies i.e. a company where the shares are NOT available to the general public or outsiders. Indeed, in most cases such as this there is only one shareholder in the company, the chap who has set it up. These types of limited company will use the abbreviation "Ltd" at the end of their name, such as XYZ Ltd

If an individual operates through an "intermediary" such as a private limited company, HMRC will not like it if the only reason they are doing so is to prevent them from being put on the payroll of the organisations they work for as normal salaries staff.

If that is the case, there is a chance that IR35 will need to be applied to the income that the one man band limited company is generating. IR35 states that the limited company calculates and pays over to HMRC the PAYE and NI that would otherwise have been collected by the employer if the individual had been employed properly.

Just because the people you know "have not been investigated" is no guarantee that what they are doing is correct. Indeed, some of them may very well be applying IR35 to their company income which means HMRC will leave them alone.

Look up the case of "Dragonfly Ltd" to see where it can all go horribly wrong for a one man band limited company.

[HootersGsy]

A plc doesn't have to be listed. Listed companies however do have to be plc's as their shares are offered to the public.

A plc just has to have share capital of £50k and, I believe, 2 shareholders.

Being a plc might help the argument against being a PSC as it wouldn't be 100% owned by the individual but probably a rather tenuous position to take.

[Countdown]

HootersGsy said:

A plc doesn't have to be listed. Listed companies however do have to be plc's as their shares are offered to the public.

A plc just has to have share capital of £50k and, I believe, 2 shareholders.

Being a plc might help the argument against being a PSC as it wouldn't be 100% owned by the individual but probably a rather tenuous position to take.

There is a difference between Plc and Ltd.

Contractors/self employed will be trading as Limited (Ltd) rather than plc, which I think is the point that EMc is trying to make.

[Eric Mc]

Yes - I was keeping it simple for the OP.

Also, the reporting and filing requirements for a PLC are a lot more onerous than for a Ltd - which in my mind would make it a totally inappropriate vehicle for a one man band IT contractor.

[UpTheIron]

numtumfutunch said:

Hi

Im employed and salaried full time and do some freelance work in my own hours earning an extra 20% approx of my salary
The work is piecemeal and would involve writing reports or spending days on site at various other agencies

Most of us in my job do this and theres a 50:50 split between those of us with a cautious approach to tax evasion and the chancers who have set themselves up as a PLC for this extra work

Over the years I am not aware of anyone ever being taken to task by HMRC for this and now Im wondering if my moral high ground is misplaced and paying top rate tax just plain naive

Ive read lots on IR35 and just cant see how paying my fee from a subcontractor into a PLC would keep the revenue happy

Comments welcome

Thanks

Eric has explained the PLC / Ltd confusion. You also need to understand there is a difference between tax avoidance and tax evasion.

Back to your question, I have a couple of question:

1. Why do you think you have the moral high ground? This suggests you acted on some sort of information when you first started this "freelance" work that meant you went PAYE/Umbrella rather than set up your own Ltd company.

2. The work you do - are you doing this for a "client" or a "manager". Do you see yourself as a business providing a service to multiple customers, or are you just doing extra part-time work for a different employer?

[Eric Mc]

In many, many cases, there is nothing "morally" wrong with operating through your own limited company. If what you do can be explained properly as a bona fide business, then IR35 will not be an issue.

However, if the limited company you have set up has the sole purpose of avoiding PAYE and NI being charged on your income, THAT is when IR35 will rear its ugly head.

It is up to the parties involved to take every step possible to show, in both words (the contract) and deeds (the nature of the actual working relationship between the various parties) that a true business relationship is in place and not a pseudo employee-employer relationship.