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New tax rules for individuals working via their own companies - news article image

New tax rules for individuals working via their own companies

7 Jan 2021

4 minute read

In July 2019, my colleague Leigh Smith detailed the proposed changes to Intermediaries Legislation (IR35) or ‘off-payroll working rules. These changes were due to come into effect in 2020 but have been pushed back due to the Coronavirus pandemic. The Government now plan to make these changed from 6 April 2021.

The new tax rules will be introduced for individuals who provide their personal services via an ‘intermediary’ to a medium or large business. An intermediary can be another individual, a partnership, an unincorporated association or a Limited company. The most common structure is a worker providing their services via their own company (PSC). 

The new rules will mean that: 

  • The medium or large business or an agency (the entity) will calculate a ‘deemed payment’ based on the fees the PSC has charged for the services of the individual
  •  The entity that pays the PSC for the services must deduct PAYE and employee National Insurance contributions (NICs) as if the deemed payment is a salary paid to an employee 
  • The paying entity will have to pay to HMRC not only the PAYE and NICs deducted from the deemed payment but also employer NICs on the payment 
  • The net amount received by the PSC can be passed on to the individual without paying any further PAYE and NICs. 

The practical effect of these rules is that individuals will no longer benefit from the potential tax advantages of receiving income via their own company. There may also be pressure from businesses to renegotiate contracts due to their increased cost of employer NICs. 

How is a medium or large business defined?

The legislation uses an existing statutory definition within the Companies Act of a ‘small company’ to exempt small businesses from the new rules. Therefore the rules will exempt businesses meeting any two of these criteria: a turnover of £10.2 million or less; having £5.1 million on the balance sheet or less; having 50 or fewer employees. However, if the business receiving the work of the individual is not a company, it is only the turnover that will apply. There is no change if services are provided to a small business. Even after the changes are introduced from 6 April 2021. 

HMRC has a Check Employment Status Service tool (CEST) to help businesses decide the status of individuals providing personal services to them, this can be found here

What is the effect on tax? 

The individual providing the service will be treated in tax terms as an employee of the entity. So if a contract ends during the 2021/22 tax year, the paying entity should send a P45 showing the total deemed payment and deductions for PAYE and NICs. If the contract extends over the 2021/22 tax year, the paying entity should issue a P60 to showing the total payment and deductions in the 2021/22 tax year. 

The individual will need to show the amounts on the P45 or P60 on the employment pages of the 2021/22 self-assessment tax return and this may not necessarily be just the payments received from the entity in question (and therefore shown on the P45/P60 if there is additional employment to declare. 

How can Shaw Gibbs help? 

1. If you plan to continue to use your PSC to deliver services 

There are ways of extracting income from your company in order to avoid being taxed twice. We are ready to help you to understand and work with the legislation. 

2. Closing your PSC in a cost effective and tax efficient manner 

If you are no longer in need of your limited company previously used to contract your services, it is likely that you will need to close the company, and want to extract the remaining value in the most cost effective and tax efficient manner possible. A solvent liquidation (Members Voluntary Liquidation) may be the most appropriate course of action. When planning for such an exit, early planning is advisable and Karyn Jones, Partner and Licensed Insolvency Practitioner for Shaw Gibbs Insolvency & Advisory will happily discuss whether this option if the right course of action.

New tax rules for individuals working via their own companies - news article image

Author:

Darshil Shah

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