Hi,
I run a small limited company which is primarily used for my own contracting work and that of my fiancee.
I have completed several contracts for software development over the course of the year and have continued to bring in earnings into the company. Recently my fiancee started working through the company on a short term content manager position. This work was found through an agency who we bill directly, we have no specific contract with the client that the agency found. My fiancee has the power to change her days and hours at will (obviously checking with the client first), and has exercised this moving from 4 days to 3 and 2 day working weeks depending on her availability. She currently has no other work, but is spending time on other things (wedding and study). She has been operating in this position now for a little over 3 months, and expects it to end sometime early in the new year, though the date is as yet undecided since the client is trying to hire a full time employee to fill the position. It was always made clear that the position was temporary and was just to fill-in while they tried to find an employee to take the position on.
For further background: I pay myself a maximum of £600 per month, and pay her £400 to avoid national insurance payments since we don't intend to remain resident in the UK for much longer (we are UK passport holders, but intend to emigrate soon). We were advised to do this by our accountant. The rest we pay out in dividends to myself as I am the only shareholder.
I am concerned that without a clear contract stating substitution she will fall foul of IR35.
What advice would you offer? Should we demand the agency draw up a contract with a substitution clause?
Any help you could offer would be great, thankyou.
--
Joe
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Replies (19)
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Contract not important
I think you are worrying far too much about having a contract in place.
HMRC no longer see a contract with a substitution clause in it as a significant indicator of someones IR35 status.
What they would do now, in the event of a compliance check, is to speak to your fiancee's client and find out exactly what her working practices were, how much control was exercised by the client over your fiancee's work etc. etc.
It sounds to me like your fiancee was very much engaged (pardon the pun :-)) on a self employed basis and I wouldn't give it much more thought.
Apart from anything else, the chances of being selected for an IR35 compliance check these days is slim.
That is excellent news.
I had wondered if we were worrying too much. She has been exercising a good deal of freedom in her hours, and is literally telling them what to do with regard to her job since they have no in-house knowledge at all with regard to web content.
Thanks a lot.
Not sure I see the point of the query
Am I misunderstanding?
It is your company, she is not a shareholder or director, the client believes your company is providing her services and is paying your company.
I cannot see how that makes this an IR35 risk - she is not a controlling party and the monies are not directly going to her in line with her earnings.
You sound as though you are treating her as an employee on a monthly salary within PAYE which has no relation to the work she is actually carrying out at any time, If that is the case I would need to be sure that she is within the national minimum wage parameters for the hours contracted to be worked.
Controlling party?
Not sure that is strictly relevant to this being an IR35 case or not. IR35 applies to any individual charging for their services via an intermediary which obviously the fiance is. The fact that she is to be replaced by a permanent employee would suggest to me that IR35 might indeed apply in this case, however, I do share the view that it is not really a huge risk.
Hi Steve
I always thought that there had to be a link between the the intermediary and the profits the contractor was able to extract. Personal service company would to me mean that his contracts were capable of IR35 attack, but his employee's were not
Edit: that sounds a bit garbled now but hopefully you get my drift
Strictly speaking, as you fiance is not a shareholder in receipt of dividends and therefore avoiding NIC, she cannot be an IR35 target (but you might be). I'm assuming that you are dealing with your fiance via PAYE and therefore she is an employee and not subject to IR35.
As an aside, IR35 is essentially dead in the water, thanks to the efforts of the PCG.
Interesting point Marion
Legislation says ..."In addition you must receive or have rights entitling you to receive a payment or benefit that is not employment income." by which I assume they meant dividends. However, if the company invoices for the fiancee and her partner draws the dividends and shares the money with her then I am sure that would be caught.
All a moot point I suspect.
Moot point
Legislation says ..."In addition you must receive or have rights entitling you to receive a payment or benefit that is not employment income." by which I assume they meant dividends. However, if the company invoices for the fiancee and her partner draws the dividends and shares the money with her then I am sure that would be caught.
All a moot point I suspect.
Moot? Possibly not. It would be interesting to see how HMRC would view divvies that are paid into a joint bank account!
I had seen mention elsewhere of cases where a husband and wife setup similar to ours was prosecuted under IR35, but the outcome of these cases is still in appeal and as yet is undecided. I believe that in the eyes of the law a fiancee or partner is probably equivalent for these cases.
However, as you say its probably never going to come up, and we should be able to prove enough flexibility in her role and lack of benefits as well as a fixed end-date to avoid any IR35 issue.
Thanks to everyone for their help.
IR35 or S660A?
I had seen mention elsewhere of cases where a husband and wife setup similar to ours was prosecuted under IR35, but the outcome of these cases is still in appeal and as yet is undecided. I believe that in the eyes of the law a fiancee or partner is probably equivalent for these cases.
However, as you say its probably never going to come up, and we should be able to prove enough flexibility in her role and lack of benefits as well as a fixed end-date to avoid any IR35 issue.
Thanks to everyone for their help.
Are you sure that is/was IR35 and not S660A?
The issue is that of "connected persons" as we see a certain amount of woollyness in HMRC application of this rule. A spouse, partner, fiancee, sibling, parent, child are most definately "connected persons" but is a first cousin? What about an in-law?
Wooliness?
ITA 2007 - S993 seems quite clear.
Spouse, Civil partner, relative, spouse of a civil partner or relative,
Business partners are connected with their business partners as well as those partners spouse, civil partner or relative.
For IHT purposes, the definition of ‘a relative’ is restricted to a brother, sister, ancestor, lineal descendant, uncle, aunt, nephew or niece.
For CGT, relative means:
•brother or sister;
•mother, father and remoter forebears; and
•children and remoter descendants.
A fiancee or life partner (without marriage) is not a connected party.
Wooliness
Have a look at S61(4). "Fot the purposes of this chapter a man and woman living together as husband and wife are treated as if they were married to each other".
Last one to leave turn the lights out .....
Your accountant told you to emigrate? What he does know that we don't?
@tim
okay now - found your reference.
This is a specifically written part of the new managed service companies rules relating to the transferability of the service providers debt.
This company does not seem to fit the criteria of an MSC.
Marion,
Section 61 is part of Chapter 8, the intermediaries legislation. Managed Service Company legislation appears in Chapter 9.
I wouldn't automatically assume that someone who is engaged to someone is actually living with her propective spouse.