When examining accounts, HM Revenue & Customs look out for attempts to avoid or delay payment of Schedule E tax and Class 1 NICs by means of arrangements under which directors or employees are remunerated for services provided typically by way of
- a small wage or salary in order to meet the minimum wage requirements and pay the minimum amount of NICs necessary to qualify for benefits, and
- large dividends.
The most common forms of this arrangement involve the use of a personal service company or a composite service company.
The individual gives to the personal service company the right to provide his/her services to a third party. The company may negotiate directly with a client or an agency may be included in the chain. The individual whose services are being provided may be a director or employee and shareholder of the company. In addition the individual's spouse is often a shareholder in order to minimise exposure to higher rates of tax.
In the composite service company situation, there are typically around 20 individuals whose services are being provided to separate clients. The individuals may own a specific category of shares and the scheme provider charges for the administration costs. The total payments the individuals receive from the company are usually related to the amount they earn for the company.
The intermediaries legislation, commonly known as the 'IR35' legislation, was introduced to combat this type of avoidance and it is effective for services performed on or after 6 April 2000. Under this legislation, it is necessary to consider what the relationship would have been between the client and worker for a particular engagement, if the intermediary had not existed. In other words a notional contract has to be constructed. The legislation applies if the relationship would have been that of employer and employee had the worker been engaged directly.
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