IR35 AND ALL THAT

Without question the most debated issue in taxation over the last year, IR35, named after press release of March 1999, which announced the change, is designed to prevent those who run their own personal service company from gaining an advantage by retaining profits, or paying themselves in dividends, instead of salary.

Some of the questions a person who works through their own company must ask are: Does he take financial risk?; Can he 'profit from sound management'?; Does he provide his own equipment?; Does he have several similar engagements with other parties?; Can he send a substitute to do the job?; Does he have control over how he does his work, where he does it, and when?

If the answer to most of these questions is no (it is important to consider the entire picture), then the income received by the individual sub contractor is a deemed salary (subject to a deduction for travel costs, pensions, the employers NIC and 5% of the gross income) that must be subjected to pay?as?you?earn income tax and national insurance.

To avoid IR35 the contract must show that the engagement is not akin to that of an employee. Most experts agree that the two most important considerations are the right to send a substitute to do the work if the sub contractor is unable or unwilling to carry out the work and the need to take some financial risk, for example by being paid a rate for a task rather than an hourly or daily rate. However, the Revenue will look for evidence of actions rather than words and contracts may not be enough.

CGT RELIEF FOR BUSINESSES

The Finance Bill 2000 carries a key change in Capital Gains tax that is very good news for those who run their own businesses. The holding period for CGT taper relief for business assets is being reduced from 10 years to 4 years. A higher rate CGT payer will pay tax at 20% after 3 years and 10% after 4 years. These changes apply for disposals of assets after 5 April 2000.

The thresholds for shareholdings in unquoted and quoted trading companies which are necessary to qualify for the higher tapering relief are reduced so that the relief will apply to all shareholdings held by employees and others in unquoted trading companies; all shareholdings held by employees in quoted trading companies; and shareholdings in a quoted trading company where the holder is not an employee but can exercise at least 5% of the voting rights.

The period for which the assets must be held to qualify for the relief began on 6 April 1998 so that after 5 April 2002 all disposals of qualifying assets will be taxed at a maximum of only 10%. This enhanced tapering relief will compensate to some extent for the gradual withdrawal of retirement relief. However, it remains true that, for a person aged 50 or over, the new relief is still not as generous as the retirement relief for gains of less than £500,000.