Q. If IR35 applies, all payments to the intermediary are treated as your employment income and the intermediary must pay any tax and National Insurance contributions due. It ensures that you pay roughly the same amount of tax and National Insurance contributions as if you’d been directly employed by the client. With an IR35 situation coming to an end (the contract is terminated) is it acceptable/legitimate to use some of the final revenue to fund a tax and NI free redundancy payment to the contractor?
A. As it would be the director’s choice to stop trading & closing the company then HMRC would be unlikely to accept that the termination payment was true redundancy pay & therefore deny tax-free status for payments made up to £30K. In the most unlikely event that a director of a PSC had a contract of employment, which would mean they would have to be paid at least the National Minimum Wage, then it might be possible to pay statutory redundancy pay but even then this would be open to challenge by HMRC unless there were other employees given equal terms.
I think you’ve misunderstood the question. It wasn’t what happens if you close the company, but what happens when the client terminates the contract.
There’s a moral argument that if HMRC are treating you as a direct employee when it benefits them (collection of tax) they should also treat you that way when the roll is terminated against your will (redundancy payments).
I think the problem would come with convincing people this is a genuine redundancy, as you’re still employed afterwards – needs a redundancy expert.
The whole area, is a concern, if we as contractors are expected to pay full tax and NI and are deemed as employees, then surely where are the rest of the benefits? This is trying to make us all take on fixed term contracts, at least we would have some benefits from the business. Long term this is going to cripple business 🙁
I, too, think this is the most worrying thing about IR35. It treats the contractor as an employee for tax, but gives none of the benefits. Personally, I would say that, if a contract falls under IR35, the contractor should be treated as an employee of the company they are contracting for (not of their own limited company) with all the rights and benefits of that employment. This would be more in keeping with the spirit of the legislation.
As for the initial question, I am no expert, but my take on it would be this: You are treated as an employee of your own company for the purposes of IR35. When the contract terminates, you are not being made redundant. Rather, you will move on to another contract and remain “employed” by the company (in one form or another). So I would doubt that you can claim redundancy.
I think this is the whole issue with IR35 – if you have to pay yourself PAYE/NI upto 95% of a contracts value every month then you have very little money left for all the company expenses (accountants, laptops, software licenses, subscriptions, etc) needed to keep the company running AND absolutely nothing left to keep paying a salary when you have contract breaks.
I still don’t understand the legal basis around a PSC? I am an employee of a limited company according to Companies House. I as CEO need to be able to manage the cashflow of that company in order to make it viable and manage the very real risks of trading.