What are the changes to IR35 legislation for directors and office holders from 6 April 2013?
An office holder in company law means either a director or company secretary.
Under tax legislation earnings from an office are taxed as employment income and are generally subject to Class 1 National Insurance contributions (NICs).
You will be an office holder of your own contractor company and you will probably be taking a small salary; the new rules are not aimed at this situation.
What if a client engages you and makes you a director of their company?
When a client engages a worker as an office holder it is probable that they will liable to tax and NICs on any amount paid for director’s services. Not being paid for director’s services is not the answer.
You have a choice:
- Either you will need to split your contract with your client so that your are paid a salary for the director’s services and you have a contract through your contractor company for the consultancy services. The director’s salary need not be high as you will only be preparing and attending between 8 and 12 meetings a year; or
- Your contractor company will have to be appointed as the director and you, or a substitute, will be supplied to attend the meetings but you will not be a director of your client company.
What if I ignore this information and become a director of my client’s company and continue to invoice my client through my contractor company?
It is likely that HMRC would consider the full amount you invoice your client as salary for director’s services and therefore PAYE and NIC would be due from your client. Depending on the wording of your contract the tax liability may be passed back to you if you have provided an indemnity on tax and NIC.
What about IR35?
It will only be necessary to consider the IR35 rules on any amounts that have not already been subject to tax/NICs as employment income.
When is this change effective?
The IR35 tax legislation is being extended to office holders for the 2013-14 tax year onwards and this change will only apply when a worker’s personal services are supplied via an intermediary to perform the duties of an office.
HMRC have provided the following example
A non-executive director who also provides consultancy services to an organisation will always be subject to IR35 for NICs and will be brought under IR35 for tax from 6 April 2013 when performing their duties as holder of the office of non-executive director. However, IR35 will not apply to the consultancy services, unless they are provided in circumstances when the worker would be regarded as an employee if they had been engaged directly by the client.
HMRC have stated that the new rules do not apply:
- simply because a worker is a director of their own personal service company
- nor just because their job title refers to them as an ‘officer’ but they do not hold an office
- nor when a company engages another firm as auditor and there is no requirement for an individual’s personal services