If you operate as a Personal Service Company but work predominantly with a single client that provides all or most of your business income, this can present issues when filing your tax returns.
In these situations, Her Majesty’s Revenue and Customs (HMRC) may question why you don’t work directly for the client, and you may be considered a ‘disguised employee’.
What is a disguised employee?
A disguised employee is defined as someone who performs a high volume of regular work for a single client but is paid as an external contractor rather than through the company payroll.
This is advantageous for the client as they do not have to pay National Insurance Contributions or employee benefits on your behalf, whilst you can enjoy the allowances and reliefs typically associated with self-employment.
When successfully investigated, disguised employment is interpreted as a form of tax avoidance and will result in the implementation of special government legislation named IR35.
What is IR35?
Introduced in April 2000, IR35 allows HMRC to collect additional payment from an independent contractor when they are deemed to be an employee of a company in all but name.
If the contractor is determined by HMRC to be a disguised employee, they will have to pay Income Tax and National Insurance Contributions on their earnings from the client as they would if the income was gained through standard employment
What can I do?
If you are concerned that your working practices may be in breach of IR35, there are several steps you can take in order to prove you work independently and avoid potential investigation.
Become a Sole Trader
If you are self-employed as a Limited Company, you may find that operating as a Sole Trader is a better option whereby you can pay your employment contributions directly. This will mean closing your business and filing final returns, then setting up as a self-employed contractor.
Build your client base
An obvious resolution is to work for several different clients rather than just one. This provides a great opportunity to build your business, offers financial security if a major client was to pull out, and gives a clear indication that you are actively working and seeking work from multiple customers.
Review your contracts
The contract of service you have with a client can be a key indicator of being a disguised employee, so it is important to state that you are not subject to the control of the client and that you are not bound to the processes and procedures that would apply to a regular employee.
Make your independence clear
Not receiving sickness or holiday pay is a fair indicator of independent working, but it is also important that you make clear the financial commitment and risk you bare as a contractor. Where applicable, this includes using your own work tools, materials and premises to perform the work required.
Manage your own assignments
Always agree ‘project based’ assignments rather than contracts covering a pre-determined time period and ensure that the management and delivery of any work is undertaken as a third party. Working on a fixed-price project is also a strong indicator of independent working.
Provide a ‘Substitute’
In circumstances such as illness, injury or heavy workload, offering a substitute contractor to work on an assignment in your absence shows that you are not obliged to offer a completely personal service and that the client is not 100% dependent on you to perform the work required.
Managing your business relationship
It is vital that the client understands the nature of your agreement and treats you as a third party. This includes sticking to the agreed scope of every assignment, implementing the same privacy and security measures as with any other contractor, and not offering any un-agreed bonuses or benefits.
Please note…
The rules surrounding IR35 are set to change in April 2020, with new legislation meaning the main responsibility for deciding your employment status will lay with your client.
Until then, an advantage of keeping your limited company operating is that you may be entitled to a 5% tax allowance that covers essential business expenses.
To find out more and learn how you can apply, please contact the friendly team at Ease Accounting today.
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