Contracting Tax Issues – IR35, Section 660 and Income Shifting

If you are new to contracting, you may never have heard of these tax issues, but they are probably the most discussed pieces of tax legislation within the contracting industry. We’d recommend you take a look at our dedicated sections on IR35 and Section 660, as well as our overview below.

IR35

IR35 first reared its head via an Inland Revenue press release in 1999 entitled: ‘IR35: Countering Avoidance in the Provision of Personal Services”.

The IR35 rules were invented primarily to stop freelancers (particularly IT contractors) from drawing income in the form of a small salary and large dividends from their limited companies, where ordinarily they would be paid a standard salary for performing the same role if they were not working via their own limited company.

In determining whether a person’s employment is deemed to be subject to the IR35 rules or not, the Inland Revenue would need to work out if that person is ‘employed’ or ‘self employed’ according to the IR35 rules.

A person who worked 9-5 on a client site, had little or no direct responsibility and provided no tools of his own to complete a task would most likely be deemed as ‘employed’ and therefore subject to the IR35 rules. However, a freelancer who worked from home, performed tasks for multiple clients and used his own equipment to complete the work would more likely be deemed ‘self employed’ under the rules. The Revenue would look at the overall picture to determine a person’s employment status, so the more pointers there are to genuine ‘self employment’ the better.

As a result, you should always ask a legal expert to look through any contracts you sign with clients, to ensure they do not fall under the IR35 rules. Additionally, your accountant will be able to provide you with advice on how best to ensure that your contracting business structure is right for your needs, and where possible, you will not be liable under the IR35 rules.

Click here for our dedicated IR35 section.

Section 660 / Income Shifting

The Section 660 rule, has been UK legislation since the 1990's. Its primary aim was to prevent people passing across assets and income to family members in an effort to reduce their tax liabilities, whilst intending to reclaim those assets at a later date. However, this rule was not, until recently, applied to company dividend payments.

Now known by many as the 'married couples business tax', the Revenue have recently begun to claim that the Section 660 rules can be applied to dividend income received. In other words, where a limited company director has his non-fee earning spouse as a joint-shareholder, any dividends she receives from the company should be taxed as her husband's income. Although this tax is being fought vigorously by several pressure groups, some people have received tax demands amounting to tens of thousands of pounds, backdated several years.

Again, if you feel you may be affected by Section 660, you should discuss your concerns with your accountant. A dedicated contractor accountant will be fully aware of the Section 660 legislation and should be able to provide sound advice.

As HMRC have been unsuccessful in enforcing Section 660 in the courts, they now propose to crack down on "family business tax" via income shifting legislation.

Click here for our dedicated Income Shifting section.