Chapter 16 Anti-avoidance for owner-managed businesses Flashcards
1.1 Employment vs self-employment
Contract of service (employment)
Contract for service (self-employment)
Degree of control by employer: High Low
Mutuality of obligations: High Low
Costs of correction of work borne by worker:
Unlikely Likely
Financial risk by worker: No Yes
Provision of own equipment: Unlikely Likely
Payment: Fixed level of pay Paid for work done
Legal protection: High level Low level
Disciplinary rules: Subject to company rules Not subject to company rules
Client portfolio and exclusivity: Does all work for single party
Has a number of clients
A worker can use HMRC’s online tool, check employment status for tax (CEST) to check the employment status.
1.2 Employment vs self-employment tax treatment
Employed Self-employed
Income and basis of assessment: Employment income
including private use benefits – assessed on
a receipt’s basis
Trading income with no
deduction for private expenditure.
Assessed on current year basis with
special opening and closing years
Allowable expenses: Wholly, exclusively and incurred
for purposes of employment
wholly and exclusively incurred for
purposes of trade
NIC: Class 1 primary and secondary,
Class 1A and class 1B
Class 2 and class 4
Payment of tax and NICs: Deducted under PAYE system
Income tax and class 4 NICs on 2
payments on accounts. Class 2 NICs is one
payment on 31 January after the tax year
2.1 Use of intermediaries – anti-avoidance legislation
There are three types of anti-avoidance rules that can apply:
- Off-payroll working consider if dealing with a client that is a public sector organisation or services provided to a large company.
- IR35 rules: consider when dealing with a client that is a small private sector organisation.
- Managed service companies
2.2 Off-payroll working.
Rules apply when:
- An individual provides services to a client via an intermediary, and
- Client is a public sector organisation or company not classed as small for these purposes.
- Intermediary is either a company the working holds more than 5% in a partnership, or the worker is entitled to 60% of the profits.
A small company is one that meets two or more of the criteria under CA2006 (turnover less than £10.2m, balance sheet total less than £5.1m and less than 50 employees.
If the rule apply the main company is responsible for determining if the worker meets the definition of an employee. The worker is informed of their decision of a status determination statement. If the worker is deemed as employed, a deemed direct payment is calculation for the engagement as:
Total amount invoiced to client by intermediary (net of VAT charged) X
Less direct cost of materials used (X)
Less allowable employment expenses (X)
Deemed direct payment Y
This is then payable to HMRC based on the deemed payment, the deemed payment net of employee tax is then paid to the intermediary. The deemed payment is treated as employment income for the worker.
the amount received by the intermediary will not be subject to CT. Any amounts extracted by the worker from the intermediary will not be subject to further income tax and NICs. Any amounts extracted by the worker are non-deductible for the intermediary for CT purposes.
2.3 IR35 anti-avoidance legislation
If the OPW rules do not apply, IR35 should be considered. These are relevant if the client is a private sector company, and the company does not meet the definition of a large company. It is for the intermediary company to decide if IR35 applies. Under IR35 a deemed employment income payment is calculated if:
- An individual works for a company via an intermediary business, and
- That individual would be deemed to be an employee of the client but for the existence of the personal company.
The calculation is as follows:
Total amount invoiced to client by personal company X
Less 5% deduction (X)
Less gross salary (X)
Less employer’s NIC paid on salary (X)
Less allowable employment expenses (X)
Total deemed salary plus class 1 secondary NICs Y
Less class 1 secondary NICs (Y x 15.05/115.05) (X)
Net deemed payment Z
This is treated as if the deemed salary was paid on 5 April. Any dividends received will be treated as if they have been reduced by any amounts taxable as employment income.
2.4 Managed service companies
A MSC is one which supplies the services of individual workers to third parties, and the worker receives the majority of the payments received by the MSC from the client in relation to the worker’s services and they worker receives payments which are more than they would have been if they had been treated as employment income paid after the deduction of IT and NICs via PAYE, and a MSC provider is involved with the company.
There is no requirement to determine if the employment status tests have been met. If the rules apply:
- Workers are treated as if they have received a deemed employment payment on any actual payments made by the MSC to the worker which have not been subject to IT and NIC via PAYE
- The payment is chargeable when the payments are made, not at the end of the tax year, and
- The only allowable deductions from the deemed payment are those that would be allowable under the normal employment income rules and any employer’s NICs actually paid.
3.1 Close companies
A company under the control (more than 50%) of five or fewer participators or any number of participators who are directors. We also include the shares owned by the participator’s associates. Directors include person occupying the position of a director, shadow directors and managers who own more than 20% of share capital of company (include holdings of associates).
Associates include relatives of the participator, business partners of the participator, trustees of any settlement where the participator was the settlor, trustees of an estate in which the participator has an interest and relatives include spouse, partners and grandparents, children and grandchildren and siblings.
A company is not close if it is quoted with at least 35% of shares held by the public, or it is controlled by one or more companies which are themselves not close.
3.2 Implications of a close company
When a close company makes a loan to a participator the company pays notional tax to HMRC of 33.75% (32.5% for loans made prior to 6 April 2022). Tax charge is the lower of the value of the loan and the amount still outstanding at the due date. Tax is due the same as CT liability.
If the loan is repaid or written off, HMRC will repay the s455 tax, repayment due on normal CT due date. If there is a repayment of more than £5,000 and a new loan of more than £5,000 is made within 30 days of this the repayment is matched with the later loan.
If the loan is written off by the company, HMRC repays the s455 tax and any part of a loan written off is a disallowed expense for the company, and the participator is treated as having received a distribution equal to loan written off. The distribution is subject to class 1 NICs if the participator is also an employee.
If the participator is also an employee, a benefit in kind will be assessed on the employee if the loan is given at a favourable rate of interest. S455 tax does not apply to loans made in the ordinary course of business and loans to directors/employees if less than £15,000 and is a full-time worker and owns less than 5% of the company.
A taxable benefit provided to a participator, who is not an employee cannot be taxed through the employment income rules. Instead, the benefit is taxed as a distribution and the cost to the company of providing the benefit is disallowed. No class 1A NICs are payable on the deemed distribution.
3.3 Implications of a close company – qualifying interest and close investment holding companies
Qualifying interest is relevant to a participator who owns at least 5% of a close company or is a full-time member of management. If a relevant individual takes out a personal loan in order to lend money to or buy shares in the close company, any interest paid by the participator is given income tax relief, as a deduction against total income to give net income. This is subject to the rules for restriction on income tax reliefs against total income.
A close investment holding company is a close company that does not trade. Interest relief is not available to participators who take out a loan to buy shares or lend money to a close investment holding company. A close company will become a close investment holding company after it ceases to trade.
