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HMRC internal manual

Debt Management and Banking Manual

HM Revenue & Customs
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Interest: Interest Review Unit (IRU): PAYE and National Insurance Contributions: Intermediaries Legislation (IR35)

Working through an intermediary, such as a service company.

The aim of the legislation is to stop people avoiding paying tax and National InsuranceContributions (NIC) by using intermediaries, such as service companies or partnerships, incircumstances where an individual worker would otherwise, for tax or NIC purposes beregarded 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 anemployee, and paying Class 1 NIC on payments for services, by providing those servicesthrough an intermediary. The individual is usually named as a director of the intermediarycompany. The director then takes money out of the intermediary company in the form ofdividends instead of salary. As dividends are not liable to NIC, the use of a dividendremuneration strategy results in the worker paying less NIC than either a conventionalemployee 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 clientwould have been one of employment had it not been for the intermediary, then the workerpays tax and NIC on a basis that is broadly fair compared to what an employee of theclient would pay.

The new rules mean that businesses that receive income that falls within the IR35legislation must operate a PAYE scheme. If they do not, it is their responsibility to workout an estimated payment of what tax and NIC they judge is due from income received up to5 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. Ifthis payment calculation cannot be made by 19 April, then a payment on account should bemade. If this is done, then the business must send a letter with the P35 to say that thefigures 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 correctfinal payment of tax and NIC. This includes any underpayment coming from both the originaland amended P35 returns.

Normally interest charges will be upheld because the business did not follow the correctprocedures concerning judged payments.

Interest objections may be received that involve claims that the status officer was latemaking 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 wasbeing paid by voluntarily applying the IR35 rules, until told they did not apply. As longas this was done there would be no interest liability.

Interest charges should normally be upheld. However where there has been unreasonable HMRCdelay, consider giving up interest in line with the guidance given at DMBM405010.