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The August 2002 Tax Bulletin contains an article (at www.inlandrevenue.gov.uk/bulletins) pointing out that Composite Service Companies, where typically employee A has 'A' shares and employee B has 'B' shares are subject to the Personal Service Company legislation and are currently the subject of Inland Revenue attention.
The regulations do not have any effect where there is a genuine "self employment" situation, which is demonstrated, for example, by the substitution of another worker to cover holidays or sick leave of the employee.
The above paragraphs were added 26 August 2002.
Accountancy Age 20 February 2003 reported the Professional Contractors Group as having identified the Inland Revenue applying Section 660 of the Taxes Act in a manner not previously experienced. The Section would typically assess dividends paid to a share owning spouse as income of the employee.
The following is unchanged from 17 February 2002 and still valid.
The latest details are available at http://www.inlandrevenue.gov.uk/ir35.
Gordon Brown announced in his March 99 budget that the tax rules for individuals who hired themselves out through their own personal service company would be changed from 6 April 2000.
The 23 September 1999 Inland Revenue Press Release puts the burden of compliance on the personal service company. It is not necessary to register and produce exemption certificates as used in the building industry. A procedure is promised to allow taxpayers to agree with the Revenue whether or not they are within the new rules.
The new rules will apply to contracts where a worker provides services under a contract between a client and an intermediary company and, but for the presence of that intermediary company, the income arising would have been treated as arising from employment. The test will be the existing rules for determining employment status. This is a notoriously grey area, and the modern working environment, where contract workers and clients work closely together on projects taking instructions from each other, is different from the traditional distinction between employer and employee.
From April 2000, those affected by the new rules have to make a calculation of the income from relevant engagements, from which can be deducted expenses which would be allowable to an employee, salary, national insurance and pension contributions they have taken as though they were employees and 5% of the income to cover expenses of running the company.
In effect the rules will prevent profits being distributed as dividends without a charge to national insurance. The Paymaster General believes a 'substantial' contribution to the Exchequer was previously being 'avoided'.
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