Anyone reading this who is, or has ever, provided their services via a personal service company will probably have read the details of the BBC case with a sense of trepidation.
Although the benefits are being chipped away year by year, it is still just about beneficial in terms of tax, and especially national insurance, to operate your one-man business as a self-employed contractor rather than as an employee of the end client(s) you do work for. You are allowed tax relief for expenditure that would be denied as an employee, whilst your end client avoids the onerous obligations and costs associated with having employees (eg, sick pay, maternity leave, employers national insurance, etc).
The problem for businesses using self-employed contractors is that they are vulnerable to attack by HMRC’s PAYE inspectors. If it is determined that contractors are actually employees, it is the end client that will suffer the back tax and national insurance, as it was the one that should have operated PAYE.
To reduce this risk it has become normal for businesses to insist that where workers supply services the supply is made via a personal service company. In other words, John Smith has to set up and operate via John Smith Ltd. A limited company can’t be an employee so the risk to the end client of re-classification of contractors as employees disappears.
However, people who come up with tax legislation aren’t stupid. They created the IR35 rules which broadly say that where an individual is engaged via an intermediary (e.g. their own personal service company), under terms that would constitute employment by the end user if engaged directly, the intermediary must treat the fees received as income of the individual and operate PAYE.
So the risk of reclassification doesn’t disappear – it moves from the end client to the personal service company and thus in effect the individual who owns it and works via it.
This is what happened in the BBC case. Christa Ackroyd was a TV presenter and was required by the BBC to operate through a limited company – Christa Ackroyd Media Limited. Many years down the line, HMRC challenged this arrangement. The dispute was whether, if Ackroyd had been engaged directly by the BBC on the same terms, would she have been an employee. The answer, according to HMRC and subsequently the tax tribunal on appeal, was yes. IR35 therefore applied, and Christa Ackroyd Media Ltd’s income should have been treated as income of Christa Ackroyd and PAYE applied.
The end result is a bill of £420,000 for additional tax and national insurance that should have been paid. Cost to the BBC? Nil.
This is the first of what promises to be many similar cases. Of course, the vast majority of personal service companies are operated by IT contractors and the like, not media people. If you’re one of them – review your arrangements extremely carefully. HMRC has the wind in its IR35 sails after years of relative calm and that doesn’t bode well for taxpayers.
Chris Martin is a chartered accountant and business advisor and has been helping franchisees create and grow wonderful businesses for over 20 years. He is a published author and has written extensively on franchisee tax issues. He passionately believes that whilst franchising is a deservedly successful business format, franchisees are often let down by their franchisors’ failure to offer support and guidance regarding the financial side of running the business. This leaves franchisees frustrated, overwhelmed and unable to grow their businesses to the extent they should. Chris has developed simple systems, support and guidance to ensure franchisees create businesses that provide them and their families the lives they so richly deserve.