Effect on contractors of the proposed IR35 office holders changes
It is likely that most contractors will not be affected by the proposed amendments to the IR35 rules for the Finance Act 2013. However, the full impact of the legislation will not be fully known until the changes are actually implemented from April 2013.
The proposed changes mean that contractors who can be described as office holders for their client, or are deemed to be by HRMC, will fall within IR35 and will be taxed at the appropriate rate.
The key change from a contractor’s point of view is that in cases where the role could potentially be described as an ‘office’ the challenge will no longer be about proving genuine self-employment and being ‘in business on their own account’. It will instead be about proving that the role does not constitute an ‘office’ within the meaning of the legislation.
Definition of office holder under IR35
There is no statue available giving a legal definition for an office so case law has provided generally agreed definitions.
HRMC guidance states that the word ‘office ‘…has been judicially defined as a ‘permanent, substantive position which has an existence independent from the person who filled it, which went on and was filled in succession by successive holders.’ Case law adds that to be legally described as an ‘office’ the role must have been created by a ‘constituent instrument’ such as a charter, statute, declaration of trust or contract (not including a personal service contract!).
Roles which would be described as offices include director, company secretary and auditor.
In the private sector, senior roles like ‘marketing director’ or ‘chief operating officer’ are not generally created by a statute or other ‘constituent instrument’ so are unlikely to fall foul of the proposed changes.
The public sector is different in this respect as there are several senior roles which were specifically created by statute and charter. Therefore, contractors acting in these roles may fall into the remit of the proposed IR35 changes. A contractor fulfilling this type of role would be advised to speak to their contractor account and work with them to plan appropriate salary payments.
Contractor Limited Company directors
Contractors who have set up as a Limited Company are usually directors of their own company and are therefore employees of the company. Partly for this reason most contractors pay themselves a nominal salary as remuneration for their director role.
It is advisable to have all of your contracts professionally reviewed before signing to ensure that you are fully aware of your IR35 status.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.