What is a disguised employee?
Contractors operating via a limited company are subject to the scrutiny of the IR35 legislation with the dreaded worst-case scenario of being caught by the legislation, meaning that you would have to pay back all of the money you made through tax efficiencies, i.e income tax and national insurance contributions on all of your income of the contract(s) in question (minus a 5% expenses allowance) plus interest and potential penalties as well. This is why contractors need to prove that they are a limited company working as a genuine business and not as a permanent employee would be but still reaping the tax benefits of a limited company business, a disguised employee.
Disguised employees are what the Revenue are looking for and are why the IR35 legislation was introduced. When the legislation was implemented, there was widespread exploitation of the tax efficiencies found with personal service companies by people working in a broad spectrum of industries and levels of seniority who were actually just working in jobs like anybody else.
Although the number of cases have now dropped since the heyday due to HMRC’s crackdown, there are still numerous cases each year and all limited company contractors need to ensure they are working compliantly as anybody can be investigated. The current focus is on public sector workers and office holders.
Public sector contractors (i.e workers operating via their own personal service company to provide services for government organisations) are now required to prove their IR35 status if contracted for more than 6 months.
Office holders (i.e workers who hold a chief position in a company which is not their own, such as a contractor working as the Director of their end client’s company) are now automatically classed as a disguised employee and must pay a deemed salary if they are to continue to operate via a personal service company. A publicised high profile case of this is the case of Ed Lester, the Chief Executive of the Student Loans Company, who despite his high position, was invoicing through a personal service company rather than being on the payroll.
There are a number of ways in which HMRC will determine which one you are. We are IR35 specialists who have been dealing with the legislation since its implementation and are able to advise you and assess your status.
If you would like any more information then please get in touch with us and we will be happy to advise you in any way we can.
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