Client provides his services via an umbrella company of which he owns 1% of share capital. Since, however, Revenue will look at non-salary payments that could be considered as payment for services provided by him is he not caught? (My view is that nature of services is such that if were providing his services via his own company there would be no doubt that IR35 would apply). Are these umbrella companies set up in such a way that Revenue cannot challenge and if so how do they work?
I have seen cases where the individual receives a weekly payslip, identifying hours spent, expenses incurred etc to give 'gross pay'. This total is then divided into two elements - notional salary and (the balance) dividend. Surely this treatment is like a red rag to a bull - dividends effectively calculated on the basis of hours worked rather than profits available???
David Lochhead
Replies (8)
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IR35 or not
David
I'm not sure if I am following what you say.
If IR35 applies, and umbrella treats 95% as PAYE, I agree there is no "issue".
Similarly, if IR35 does not apply, I agree there is no "issue".
What (I think!!) folk have been commenting upon are situations where umbrella companies are NOT deducting PAYE, yet on the facts presented IR35 clearly should apply.
So I am not quite clear on the point you are making, but am posting this note lest I am missing it.
David Kirk Ltd, Chartered Accountants and Chartered Tax Advisers
It depends. If the contract comes under IR35 then the umbrella must pay PAYE on 95% of the takings as if it was paying them out to the 'shareholder' and it does not matter how the payment is characterised. The company can call the payment what it wants - it still has to pay PAYE on it.
If IR35 does not apply, then you might think that a 'dividend' calculated on the basis of hours worked would be considered a sham, but the legislation as far as I can see does not support that contention. S 20 ICTA (I am not sure what that is in ITTIOA now) says that 'no distribution which is chargeable under schedule F shall be chargeable under any other provision of the Income Tax Acts'. Distributions include dividends, and there is no definition of either word for income tax purposes. So call it a dividend and I think that the Revenue will have some trouble challenging you.
You may be interested to know...
...that the Revenue made their views about "Composite Service Companies" clear in Tax Bulletin 60 (August 2002).
Hope this helps.
Public View
That's the Revenue's public view. However where is the action to back it up? I haven't heard of any action against a composite, but plenty against individuals.
One of the genuine benefits of a composite over an individual company is that the composite has the legal firepower to tie the Revenue in knots.
And no doubt a very wide indemnity clause in the 'employment' contract with the individual.
NeilW
They don't work. IR35 has a specific clause that allows them to see through this sort of arrangment. However I haven't yet heard of the Revenue taking an Umbrella company apart. Clearly bullying individuals makes for easier pickings.
...interesting....
....comments, Neil. I agree, umbrella companies clearly "should" not work.
I also agree that lots of folk say "but I have not had problem".
Just what IS HMRC up to (or not up to) on this? Whatever one's views on IR35, it seems preposterous that HMRC are picking up individual cases to challenge, and leaving all these utterly obvious umbrella companies alone. What is going on?