Answering common contracting queries from accountants

1. IR35 and overseas clients

What happens when the client engaging PSC is a medium/large business, but they are based overseas?

• If the individual is being engaged via their own limited company, and the engaging client is based wholly overseas with no connection to the UK: the limited company will have to consider their IR35 status under the 'old' Chapter 8 ITEPA 2003 rules, and they'll bear any liabilities arising from any 'incorrect' assessment(s) - though there may be separate considerations depending on where the services are provided.
• If the overseas client has a connection to the UK, such as an office or branch: the off-payroll working rules will have to be considered, and the non-UK client will be liable for issuing a Stats Determination Statement to the contractor.  

Remember, it's the presence of the end client that determines which part of the legislation applies - the presence of a UK agency will not affect this.

You can find HMRC guidance at ESM11025

2. Office holder issues

We’ve seen an increase in the number of contractors being engaged as office holders - such as CEO, CFO or managing director - on a self-employed basis.

What is an office holder?

The definition of ‘office holders’ is prescribed in legislation at s5(3) of the Income Tax (Earnings and Pensions) Act 2003, where an office “includes in particular any position which has an existence independent of the person who holds it and may be filled by successive holders”.

What’s the issue?

The issue here is that HMRC could deem the entire income resulting from that engagement as employment income, because it results from the provision of office holder duties. This would result in a PAYE liability, as office holder rules would take precedence over IR35 or ordinary employment status rules.

Where the only service the contractor is providing to the client is the provision of duties, then unfortunately, there’s little scope to place this engagement outside the remit of either IR35 or employment status.

Split engagement

If it’s possible to demonstrate that the individual is providing genuine services alongside their office holder duties, it may be possible to split the two engagements. For example:        

• The provision of office holder duties would be provided and invoiced under a directorship contract and subject to PAYE deductions
   
• The provision of any consultancy services would be provided as a self-employed individual

This is a simplification, as there are further considerations specifically in relation to the working practices. However, at the very minimum, there needs to be some due diligence to establish that it is possible and feasible to split out any services, and there should be a genuine justification for this to be set up this way, as opposed to simply wanting to pay less tax!

Remember: IR35 automatically applies where HMRC argues that the contract falls within the office holder rules.

3. CIS compliance

We’ve seen HMRC’s continued activity in scrutinising CIS compliance. CIS mistakes are easily made, and repeated failure across multiple tax years could be a lucrative pursuit for HMRC if penalties and interest can be applied. Where failures are serious enough, gross payment status can be revoked.

We’re often contacted when complicated issues arise during an enquiry, for example, where HMRC questions why certain works have not been subject to CIS deductions. Sometimes, the guidance available and the legislation alone are of little use when trying to confirm whether services fall under the remit of construction operations. These blind spots in the CIS arena leave businesses exposed to HMRC scrutiny, yet could also create the opportunity for their defence (based on the specifics).

Materials

Other areas HMRC are keen to look at include where materials are left out of CIS deductions, and whether the company has sufficient receipts to evidence the quantum paid for materials by the subcontractor. Generally, if there’s no receipt or evidence available, the amount should be subject to CIS deductions, and the same is true for consumables, fuel, plant hire (plant only, not operator) and manufacture or prefabrication of materials.

Nudge letters

It’s not uncommon for businesses to receive nudge letters from HMRC (or even questionnaires), essentially asking the question “without us thoroughly looking through your paperwork, are you happy you are operating compliantly?”.

While these don’t always lead to a full enquiry, and there’s no obligation to respond, they serve as reminders to businesses who may not have sufficient processes and contracts already in place to make a hasty start on getting their compliance in check. Should HMRC then choose to start an enquiry and find that compliance is not up to scratch, they may choose to take a more heavy-handed approach with penalties.

Learn more

If you'd like to discuss any of the topics mentioned in this article, or have any related queries, please get in touch with our team via email at contractorsolutions@markel.com

The Markel Tax team of specialists assists clients in remaining fully compliant with contracting issues, self-employment status, IR35, or CIS. Ensuring these matters are managed accurately is crucial to avoid future problems. Learn more about our range of consultancy services and insurance.