Contractors' Questions: Is a partner shareholder inside IR35’s reforms?

Contractor’s Question: Much of the response in this Contractors’ Question focuses on who is caught by April’s IR35 changes in terms of the end-user, rather than the worker and their tax liability. Would adding a second shareholder put me /my PSC beyond the scope of the changes?

Expert’s Answer: There are two conditions that must be met for the IR35 changes to apply:

• You (the worker) must be trading though a limited company structure (commonly called a ‘PSC’) in delivering personal (principally labour-only) services. And secondly;
• Your end hirer (or engager) must be a public sector body.

As regards the latter (which we won’t concentrate on very much in this answer as it is the worker you enquire about); the bodies are those that are covered by the Freedom of Information Act (2000). The recommend course of action for you (the worker) to find out if your client is caught by the changes is to simply ask a senior representative of your client organisation whether they fall into this category – i.e. are covered by the FoI Act.

As regards these changes applying to individual workers, it should be noted that those workers who operate through an umbrella company will not be affected in any way whatsoever.

Looking at your circumstances however, even if your limited company is more complex than a single shareholder/director, and let’s say that you do take on your partner as a shareholder, or perhaps you take on an administrator, you will still be caught by these changes. It may be worth noting that if you have historic trading losses in the company, you should be able to claim these back through your corporation tax assessment. But there is no detail about this in HMRC’s current proposals. Indeed, all the proposals on the IR35 changes are light on detail as to how taxation calculations will work in practice, for example if you have legitimate expenses, or you make pension contributions.

Nonetheless, it is clear that if your assignment is assessed by the public sector body as being inside IR35, any payment to you will be calculated on you as an individual. You will then account for that income through your company. Where you have other income or legitimate tax deductions, it will be necessary to recalculate your personal tax liability and claim back any overpaid taxes or NI deductions through your annual personal tax return.

The expert was Graham Fisher, the chief executive of contractor accountants Orange Genie.

Editor’s Note: This is the third instalment of a seven-part Contractors’ Questions series based on questions posed in a recent webinar on Autumn Statement 2016 and its impact on contracting. Click to view part one and part two.