What is a ‘Disguised Employee’? Are you one?

A contractor’s worst nightmare would be to be ‘caught’ by IR35 Legislation – i.e. you appear to be working as if you are an employee of a company, rather than being genuinely in business on your own account. This would mean that you would have to pay back all of the money you have made through tax efficiencies – all of your income from that contract (minus a 5% expenses allowance for things like insurances and professional fees) would be subject to Income Tax and National Insurance Contributions (rather than the more tax efficient mix of salary and dividends which increases your take home pay)
Contractors and Freelancers therefore, have to prove that they are truly a Limited Company providing a service to their End Client, and not someone working like the rest of the staff, getting staff benefits such as parking, canteen food, nights out, health cover benefits, pensions, bonuses – and at the same time reaping the tax efficiency benefits of trading through a Limited Company. Not to mention, they wouldn’t be very popular with the staffers who pay PAYE tax and NIC contributions on all of their income.

Qdos, our IR35 specialist partner, advise that

‘Disguised’ or ‘hidden’ employees are exactly what IR35 is designed to target. When the legislation was brought in in 2000, there was widespread abuse of the use of ‘personal service companies’. You heard stories of shelf stackers and similar using their own companies to minimise tax and NI, which is obviously something the Revenue wanted to crack down on.

What’s the scoop nowadays?

More recently there have been numerous high profile reports of disguised employment at the higher end of the spectrum. Ed Lester (you might have heard of him) was invoicing through a personal service company rather than being on the payroll, despite being Chief Executive of the Student Loans Company; he reportedly saved £40,000 a year in doing so. This type of behaviour sparked off HMRC’s renewed approach to IR35 and there are likely to be significant numbers of enquiries over the coming months.

High Profile Cases

The spotlight is particularly strong on public sector workers. In the future all workers using limited companies to provide services for government organisations are required to prove their IR35 status after 6 months. This is obviously going to create a huge administrative burden for all involved, but it proves how strongly the government feels about disguised employment.
If you have any questions on IR35, how to ‘stay compliant’ and avoid being a Hidden Employee please give us a shout and we’ll be happy to help.
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