The BBC have recently announced their intention to review the type of contract they provide to their staff following a tax review. Issuing the correct type of contract is important to avoid the heartache of tax implications for both employer and employee for getting it wrong.
The BBC currently have lots of staff who are working as “personal service companies”. The term personal services company was devised by HMRC following the introduction of IR35 by Gordon Brown in 2000.
There is no clear definition in law of what actually constitutes a personal service company, HMRC often use this lack of clarity to their advantage when investigating the tax affairs of contractors. In the contracting sector, the generally accepted definition of a personal service company is a limited company that typically has a sole director, the contractor, who owns most or all of the shares.
The contractor’s personal service company generally supplies professional services to end user clients, either directly or via an agency. The professional services, typically IT or engineering, are delivered by the contractor and, just to reinforce the point, they are also the owner and director of the business.
A limited company is a tax efficient way for contractors to work as income is split between salary and dividends. Employers and employees class 1 national insurance is not paid on a large part of their income therefore they pay less tax. No wonder this situation is often under the scrutiny of the taxman.
The use of these contracts allows a company to avoid the hassle and expense of hiring an employee showing they do not wish to have an employer-employee relationship with contractors. Some companies use agencies to act as a further buffer between them and the contractor.
However the introduction of IR35, which is designed to generate additional tax revenue, has placed the contracting industry at risk of being investigated and liable for higher tax bills.
Companies can protect themselves from the ravages of IR35 by having clear written agreements in place with their contractors. The agreements should incorporate a clause stating the contractor is solely responsible for managing tax and NI and they should be required to invoice the company. The contractors should have the freedom to choose to where to work and provide an agreed substitute and they should use their own equipment rather than that belonging to the company. Furthermore they should have the freedom to work for other companies at the same time.
The nature of the contract should be reflected in actual working practice. A company that issues such an agreement then treats a contractor like an employee with the ensuing control of the employment relationship is taking a risk of being investigated by HMRC with huge cost implications for both parties. For the protection an employment contract (contract of services) should be provided, which is what the BBC intends to do with many of its staff working for personal service companies.