• The use of Dividends reduces National insurance contributions (NIC)
• Income spreading between spouses (and partners)
• Delaying payment of PAYE and NIC on retained fees

It is this control over the timing of tax, and the possibility to reduce tax and NIC, which the government has been attacking. It believes contractors should be employed directly by clients and should be subject to PAYE and NIC immediately on receipt of any income. The provisions were intended to be a simple way to make the Inland Revenue receive the same tax and NIC regardless of the structure of the contract!!

Their hope was that the number of contractor companies would reduce significantly. The reality is that the numbers of companies are continuing to grow and we have a highly complex series of rules and regulations with many pitfalls to watch out for.

Why an early review of arrangements is worthwhile

The IR35 rules apply only if the contract is deemed to be a “relevant contract”, ie the client/contractor relationship is deemed to be that of employer/employee and not customer/supplier (see page 3). The status of a contract is an age old issue for sole traders and the problems in definitions have simply been copied over to the IR35 situation. The only difference is that if a sole trader is deemed to be an employee the client bears any additional tax whilst under IR35 the contractor company bears the cost.

The Inland Revenue appear determined to catch as many companies as possible within the IR35 net (or the alternative supply of staff rules). New Units have been established which will be looking at as many companies as possible, with IT industry related contractors being a key target. Early preparation for a review allows arrangements to be modified and could significantly improve your chance of a successful result.