DMBM405990 - Interest: Interest Review Unit (IRU): PAYE and National Insurance Contributions: Intermediaries Legislation (IR35)
Some content of this manual is being considered for archiving. If there is content you use regularly, please email hmrcmanualsteam@hmrc.gov.uk to let us know as soon as possible.
Working through an intermediary, such as a service company.
The aim of the legislation is to stop people avoiding paying tax and National Insurance Contributions (NIC) by using intermediaries, such as service companies or partnerships, in circumstances where an individual worker would otherwise, for tax or NIC purposes be regarded as
- an employee of the client; and
- engaged in employed earner's employment by the client.
Before the introduction of the legislation, an individual could avoid being taxed as an employee, and paying Class 1 NIC on payments for services, by providing those services through an intermediary. The individual is usually named as a director of the intermediary company. The director then takes money out of the intermediary company in the form of dividends instead of salary. As dividends are not liable to NIC, the use of a dividend remuneration strategy results in the worker paying less NIC than either a conventional employee or a self-employed person. And PAYE would not apply to the dividends.
The legislation makes sure that, if the relationship between the worker and the client would have been one of employment had it not been for the intermediary, then the worker pays tax and NIC on a basis that is broadly fair compared to what an employee of the client would pay.
The new rules mean that businesses that receive income that falls within the IR35 legislation must operate a PAYE scheme. If they do not, it is their responsibility to work out an estimated payment of what tax and NIC they judge is due from income received up to 5 April. This is whether the money has been paid to the director of the company or not.
The payment of tax and NIC they estimate to be due must be paid to HMRC by 19 April. If this payment calculation cannot be made by 19 April, then a payment on account should be made. If this is done, then the business must send a letter with the P35 to say that the figures are provisional awaiting the estimated payment.
The business must send a P35 return by 19 May, but where a provisional return was sent, they have until the following 31 January to send HMRC the final P35 and P14 details. Interest will be charged on any late payments from 19 April until the date of the correct final payment of tax and NIC. This includes any underpayment coming from both the original and amended P35 returns.
Normally interest charges will be upheld because the business did not follow the correct procedures concerning judged payments.
Interest objections may be received that involve claims that the status officer was late making a decision on whether the IR35 law applied. However this should make no difference. The taxpayer should have been aware that IR35 may apply and made sure that tax and NIC was being paid by voluntarily applying the IR35 rules, until told they did not apply. As long as this was done there would be no interest liability.
Interest charges should normally be upheld. However where there has been unreasonable HMRC delay, consider giving up interest in line with the guidance given at DMBM405010.