THE PROBLEM
WITH PERSONAL SERVICE COMPANIES
From 6th April 2000 special tax provisions apply where workers provide their services through the medium of personal service companies otherwise known as intermediaries. A Limited Company is an intermediary when the worker or the spouse own more than 5% of its share capital or a payment not taxable under schedule E was receivable by the worker and which represented payment for services provided by the worker to the client.
The effect of these special tax provisions, otherwise known as IR35 is to treat the fees paid for relevant assignments to the Contractor those falling on the employee side of the lines, not as company revenue but as deemed salary to the worker.
Traditionally the advantages of a personal service company have been that PAYE and Class 1 National Insurance was only payable on that part of the fee which the worker paid themself as salary.
If the worker drew their income as dividend, PAYE and Class 1 National Insurance was avoided, Corporation Tax was paid later and usually at a lower rate.
The 1999 Budget saw this as tax avoidance and proposed measures to end it.
The main change is that such companies become subject to a new annual PAYE charge on the profits earned but not paid as salary, because this revenue is now deemed salary under PAYE, expenses once traditionally claimed are no longer allowed, being restricted to a 5% allowance to cover administrative costs and expenses.
It therefore follows that to continue using a U.K Ltd Company that can be deemed a personal service company is detrimental to your financial situation and means that you will be receiving additional tax demands relating to the last seven years when the revenue sees fit to process the company accounts and link them to your personal tax returns.
However by using our offshore American company based within the EC the provisions of IR35 do not apply and we can continue using those traditional methods by which you received renumeration for your services together with a few innovations of our own.
Whilst our American company is based in Madeira, Portugal and enjoys the freedom to trade within the U.K, you need to front the activity with a new U.K Incorporated Limited Company of which you are the Director and we are the shareholders.
Corporation Tax is minimal, your basic salary plus dividend payment is subject to your personal tax under schedule E, primary national insurance is limited to your basic salary and the secondary national insurance is not paid, all the tax liability rests with you personally and is accounted fully on deferment.
THE PROBLEM SOLVED