There are increasing indications of an active approach by HMRC in its enforcement roles affecting major businesses both in the operation of false self-employment and minimum wage non-compliance.
According to press reports, most Ryanair pilots are not direct employees of the company but sell their services through companies set up for the purpose. Some of these are now coming under investigation by HMRC for not applying required employment tax deductions.
The Ryanair case will be complicated by the international aspects – it is necessary to work out whether each person involved is based for tax purposes in Ireland or the UK, for example. But for more general cases, many contractors and the companies that hire them will be asking: what is the current legal position on working as a contractor through a company?
First and foremost, in most cases the legal formality of contracts and the use of a company is recognised by both HMRC and the employment and tax tribunals – in the UK it is accepted that this means most contractors do not have an employment contract. However, there has been a series of legislative measures introduced to impose employment taxes (PAYE income tax and National Insurance contributions) on the whole income paid to a contractor company: –
- Where that company is set up and operated by the end client (or an agency), the “managed service company” legislation can apply to require tax deduction at source.
- Even where the company is genuinely operated by the contractor and not the end client, legislation known as “IR35” requires the contractor company to operate PAYE and deduct income tax and National Insurance in full – though a 5% allowance against income tax may be applied for the administrative costs of operating a company.
Where the end client is a public sector body, the legal position remains the same, but the person required to make the employment status decision moves one step up the payment chain – instead of the contractor company being required to deduct tax (which often leads to non-compliance), the person paying that company is responsible. It is widely speculated that if these new measures produce a higher tax take in the public sector, they will be expanded to cover the private sector position. A basic PAYE health check can be performed through the online employment status indicator.
If you wish to review your contractors’ status in more detail, please contact a member of the DWF employment and tax teams.
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