Residency, tax efficiency, and contract terms: Ask Andy Answers
We blinked and now it’s March, which means the IR35 reforms are now but a month away. So, without further ado, we bring you this week’s Ask Andy, where contractors have the chance to put their IR35 questions to Kingsbridge’s Head of Tax, Andy Vessey. This week, Andy answers questions on residency, tax efficiency, and contract terms. Find out how to put your own question to Kingsbridge’s resident IR35 expert at the end.
This article is for information purposes only and should not be seen as financial advice. You should always consult with your accountant for any tax advice.
I run a one-man-band engineering consultancy, and I currently have only one client who is a government agency in Dubai. I am UK-based and normally work about 20 weeks per year in Dubai, travel permitting. As this role is part-time, I regularly bid for other pieces of work but haven’t been successful in winning anything else so far. How does my company stand with regards IR35?
As you spend more than 183 days in this country you are considered a UK resident, so you have to consider if the Dubai contract is ‘inside’ or ‘outside’ IR35. For IR35 purposes, it is the residency of the worker that is important, not where the end client or PSC is located. This requires considering all the tests of employment status, then standing back and deciding if you are working as a genuinely self-employed person or a disguised employee. You could do this by running your working practices through a status tool such as Kingsbridge’s. If this produces an ‘outside’ determination, then ask your end client if they will verify it as a testimony to your working arrangements. Even if they decline, you will have still discharged your obligation to carry out IR35 due diligence.
I have had my current limited company for 25 years. I am of retirement age but want to carry on working. I, therefore, take a state pension, and I also have income from property, all of which is enough to live on. My accountant has suggested that I stop taking a salary from my company and just continue to pay myself dividends. I am confident of remaining outside of IR35, but will this strategy be a red flag to HMRC?
There are a number of risk factors that HMRC consider when deciding who to target in IR35 enquiries. HMRC can only commit to 250 IR35 enquiries each year so there needs to be material tax yield involved to make it worth their while. So, if your company is generating significant turnover from your contract(s), and you are extracting most of your profit by way of dividends, this might take HMRC’s interest, but other factors such as industry sector and end client will be contributory too. If you do not already have such, you may wish to consider taking out fee-protection or tax-loss insurance if you are concerned about the potential risk of investigation.
Dividends above £2,000 are taxed at either 7.5%, 32.5% or 38.1% depending on your level of taxable income. As you are not liable to employee’s NIC on any salary, would it be more tax-efficient for you to take a minimum salary up to the secondary threshold so as not to trigger employer’s NIC and extract any further profits from the company by way of dividend? Your accountant however knows your tax position and it may be that your income from property absorbs your personal allowance to an extent that your accountant’s suggested strategy is sensible.
If I am outside scope using the CEST tool, can the client still deem me inside?
If your end client is a public sector body or a medium/large-sized business within the off-payroll rules regime as from 6th April 2021, then it is they who are responsible for determining your status. It is therefore quite possible that they reach a different conclusion to you, but you will have the right to challenge an ‘inside’ determination from 6th April.
My client is a small business. When work dried up, they furloughed their employees and told me there was no more work, so I found a 6-week contract elsewhere. Now they want me back but on multiple projects, not a fixed appointment. When I raise IR35, they say it’s not their problem. I want the work, so do I have to say that it has to be on my contract?
If your end client is a small company, then they are correct in asserting that the off-payroll rules do not apply to them and it is you who is responsible for self-assessing your IR35 status, as is currently the case in the private sector. You are coming from a strong starting point as you can negotiate your own terms. You must ensure, however, that the contractual terms you suggest are realistic and mirror the day-to-day working arrangements otherwise unrealistic contractual clauses are nothing more than a sham. Ultimately, the end client will have to agree to your proposed terms, so make sure they understand what they are signing up to and that they simply do not sign it off blindly. You don’t want to discover several years down the line if subjected to an IR35 enquiry by HMRC, that terms that were stipulated in the contract were not representational of the end client’s view of the day-to-day working practices. With this in mind, I would recommend that you use an employment status tool, such as Kingsbridge’s, as part of your IR35 due diligence, and ask the end client to jointly sign off on the Status Determination with you.
How to Ask Andy
If you have your own questions for Andy, now is the time to ask them. So head on over to our simple form and ask away.
And if you’re wondering about the Kingsbridge IR35 Status Tool mentioned by Andy, it’s our award-winning determination tool that can give you an instant inside or outside IR35 status complete with a full report. And if your result is borderline, it gets passed to one of our in-house IR35 specialists who can perform a manual review. All for just £50 plus VAT. Visit our website for more information.