Intermediary company - tax risks?

Intermediary company - tax risks?

Didn't find your answer?

Hi

I have a client, Mrs A, who set up a consulting company (FF Ltd) with a couple of silent shareholders. The company meets the definition of a close company, and Mrs A owns approximately 60% of the issued share capital.

FF Ltd provides consulting services to clients (mainly just one client), and most of the work is done by Mrs A. She could never be regarded as an employee of the end client as she works at home, on her own terms, using her own equipment and billing lump sums for discrete projects. Mrs A is a director of FF Ltd, but does not draw a salary (one of the main reasons being that they didn't have the expertise necessary to operate a payroll - another being that income is 'lumpy' and they couldn't afford to pay her a guaranteed salary). Instead she invoices FF Ltd on a project by project basis, and reports this as self-employed income on her SA tax return.

Questions:

1. Does the IR35 risk go away completely since Mrs A does not draw dividends from FF Ltd? The IR35 risk is already minimal as she does not in any way act like an employee of the end client, but I wondered if the risk goes away altogether if she doesn't draw dividends?

2. Is there a tax risk associated with her drawing consulting fees from FF Ltd rather than salary if she's already a director of FF Ltd? I suppose FF Ltd is avoiding employers' NI, and Mrs A is paying the lower Class 4 rather than Class 1... is that the only risk?

Thanks
anon

Replies (3)

Please login or register to join the discussion.

Euan's picture
By Euan MacLennan
27th May 2009 16:01

I thought ...
... that only MPs asked supplementary questions.

Yes - I think you have no alternative but to reflect the status quo on Mrs A's tax return and show it as self-employed income.

Yes - I would write to advise her of the employment status risk to FF Ltd and suggest that she discusses it with the company accountant. Incidentally, it is a lame excuse about not having the expertise to operate a payroll - even if the company did not have the expertise, surely its accountant does or knows someone who can. You might even get the job of being the company's accountant!

And - if you have a reasonable suspicion that tax (i.e: NIC) is being evaded, you should make a report to SOCA unless FF Ltd changes its practice after being told of the employment status risk.

Thanks (0)
avatar
By User deleted
27th May 2009 14:45

Thanks - one other thing...
Hi Euan

Many thanks for your response.

I wondered how you would proceed if you were in my situation. I am responsible for doing Mrs A's personal tax return, but have no relationship or obligations towards FF Ltd - it has its own accountant. I am thinking that I have no option but to report the income from FF Ltd as self-employed consultancy income since this is what the client is telling me it is and there is no employment contract in place. But I will back this up by writing to Mrs A to advise her that the nature of this income poses a risk to FF Ltd, and while I am not responsible for the tax affairs of FF Ltd I would advise her to address this with the FF accountant.

Do you think this is enough to fulfil my obligations to the client?

Thanks

Thanks (0)
Euan's picture
By Euan MacLennan
26th May 2009 19:07

No & Yes
No - Dividends are completely irrelevant to IR35.

Yes - Massive risk to the point of being an absolute certainty. Mrs A is a director of a consulting company and works as a consultant for the company. She is definitely an employee and the company cannot avoid paying her a salary under PAYE by pretending that she is a self-employed sub-contractor. As a result of the Demibourne case (have a look at this Revenue guidance), the company may escape paying the tax already paid by Mrs A on her "self-employed" income, but they are unlikely to escape the full employer's and employee's NI contributions.

Thanks (0)