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Corporation tax/paye/national insurance for one person companies

Inland Revenue Press Release 35 issued on Budget day of this year proposed significant changes to &#34personal service&#34 companies. The Inland Revenue clearly believes that some individuals delivering services through such companies have a significant opportunity to avoid the proper operation of PAYE and National Insurance. There is also the not unimportant fact that once the payment for the &#34personal services&#34 is inside a company it can emerge by way of a dividend to the owner, who, of course, is also the provider of the service) thus making the avoidance of PAYE final and denying the Contributions Agency their cut of the payment by virtue of the fact that dividends are not subject to national insurance.

The basic model in force is that an individual who is to supply services often in the information technology, oil or media industry and often on a relatively long term contract) to a purchaser usually a company) does so, not directly but through the medium of a company established and owned by that person ie. the supplier of the service. In this way any attack on the basis that what could otherwise be treated by the Inland Revenue as an employment as opposed to self employment) could be thwarted.

In Press Release 35 the Inland Revenue promised consultation with a view to legislation becoming effective from April 5 2000. The consultation document can be obtained from the Inland Revenue but is only released to interested parties.

The use of the company as a business structure is, of course, completely legitimate so the aim of the Inland Revenue is to target particular circumstances that they feel are offensive. The basic premise of the new rules, as proposed in the Government limited consultation document are as follows:-

The purpose is to remove the opportunities for avoidance of tax and Class 1 National Insurance where an engagement is routed through an intermediary

The proposed new rules will apply where:

a worker holds an office or performs service for another person the &#34client&#34)where that person has a right of supervision, direction or control as to the duties undertaken or the manner in which they are performed.

– the worker or services are provided under a contract between the client and an intermediary such as a service company or partnership of which the worker is a member,

* They would not apply where:

– the worker&#39s services are supplied incidentally with the supply of materials and/or equipment for example, where a lorry and driver are supplied together)

– where the client is an individual who is not in business such as a householder); or an engagement is exempt.

* An engagement will be exempt if the service company has become a certified agency. This status would be granted to intermediaries who undertake to pay workers only in a form chargeable under Schedule E and subject to National Insurance.

* If the intermediary does not have exempt status for that particular engagement with the client, then the client must account for pay-as-you-earn and National Insurance contributions on payments made to the intermediary.

* The client would be penalised if he failed to check that the engagement was an exempt engagement, and the intermediary would be penalised if the certification was wrongly obtained and/or used.

* If the intermediary is a company, but the engagement does not have exempt status, then gross receipt from the client will be taxable but the tax and National Insurance contributions that have been deducted would be an allowable expense.

* If the intermediary is a partnership where the worker is a partner but the engagement is not exempt then only the amounts received net of tax and National Insurance would be accounted for under Schedule D.

* If the engagement is not exempt, then the payment to the personal services company would be subject to tax under Schedule E and National Insurance on remuneration from the deemed employment. The worker would then receive salary tax and National Insurance free from the intermediary within a fixed time-limit up to the net amount received from the client.

The full text of the inland Revenue&#39s proposals can be found at, or alternatively, copies can be obtained from Elaine Carey, Personal Tax Division, Inland Revenue, New Wing, Somerset House, London WC2R 1LB.

As will be seen from the above the right of supervision, direction or control as to the tasks undertaken is an important pre-requisite that should exist in respect of the person buying the services in order that the new provisions may apply. A key &#34let out&#34 exists where the company supplying the service warrants that they will only reward employees in a form that will be subject to tax under the PAYE system) and national insurance. This will be a certification process with the certificate being issued by the Inland Revenue authorities. Importantly the certificates currently) are intended to be issued in respect of particular contracts and not on a &#34blanket&#34 basis to cover all engagements.

As stated above though, aside from the &#34certificate exemption procedure&#34 the degree of control/supervision exercised point would appear to be a subjective issue. Many are already questioning the validity of this &#34control&#34 test.


The proposed provisions have already created significant opposition. A survey from the professional contractors group it was reported in the Times of 20/5) shows that of 3400 Britons surveyed would move abroad if these changes were introduced and would consider such a move.

Those that stay and cannot conform with exemption conditions and so wish to continue providing services may decide to go for the uncertainties attached to a direct supply of services. Will they then be employed or self-employed. There will be a real risk of at least a contention for the former, by the Inland Revenue.

All financial advisers aiming as they should/must) at the upper end of the market should take careful note of these proposed changes. There could be many of their clients for whom the financial/tax landscape could change dramatically if these proposed rules are implemented. Review and information is accordingly at a premium. If the law does change with consequent changes in status then some detailed review of pension provision will, for example, be necessary.


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