Personal Service Companies and the Employment Status Checker

It is possible for individuals to form a company and through that to provide their services for a fee, e.g. a freelance consultant.  The consultant, being a shareholder and director of the company, can pay a salary at whatever rate they choose as they are not subject to the National Minimum Wage rules. Some of the taxed profits of the company could be paid out in the form of a dividend and up to the limit of paying tax at basic rate, no further tax is payable and there is no National Insurance Contributions on dividends.

There are some consultants who are running their business through a limited company but are only contracting to one client and HMRC introduced specific intermediaries legislation, commonly referred to as IR35, to ensure a contractor is in fact a legitimate contractor and not an employee of the client they are contracting to.

If an individual supplies services to a client through an intermediary, more often than not this will be a company. If that company didn’t exist, the individual would be classed as an employee of the client and PAYE and NIC should be deducted as if the individual was an employee.

Of course this leaves the contractor uncertain about their status and whether they could fall foul of the IR35 and have to pay the further amounts over to HMRC.  Therefore, HMRC have recently put in place the “ Business Entity Tests”.

If you would like to test the status of your business then take a look at the ‘tests’ online at http://hmrc.gov.uk/ir35/guidance.pdf

This article was taken from our Pay Less Tax brochure 2012.

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