Contractors' Questions: Does the £2,000 NIC allowance interact with IR35?

Contractor’s Question: Is the typical Personal Service Company, having only one employee (its director) and who hopes not to be caught by IR35, eligible to claim the £2,000 NIC giveaway, which is on offer from this month? And how does this NIC offering interact with IR35?

Expert’s Answer: You appear to be referring to new guidance from HM Revenue & Customs regarding the Employment Allowance. This guidance provides information on eligibility, claiming, record-keeping and penalties.

The guidance states that where Personal and Managed Service Companies are caught by IR35 or the MSC legislation and forced to make deemed payments, then the £2,000 NIC allowance will not be able to claimed against such payments.

Addressing Managed and Personal Service Companies, HMRC says: “You cannot claim the allowance for any deemed payments of employment income.

“However, you can claim the Employment Allowance against the Employers’ Class 1 NICs arising on the earnings paid to your employees.”

To answer your initial question directly, any contractor operating a personal service company can offset the £2,000 allowance against employers’ NIC arising on ordinary salary. In other words, PSCs who pay any salary will be entitled to claim if they have actually paid any employers’ NIC.

However, in light of HMRC’s guidance, this £2,000 allowance cannot be claimed on a deemed payment in the unlikely event that the contractor is subject to -- and loses -- an IR35 (or MSC) enquiry.

Obviously, despite the increase in IR35 enquiries, the likelihood of a contractor having to make a deemed payment is still relatively slim, so the allowance’s interaction with IR35 is perhaps a moot point for most contractors.

The expert was Seb Maley, a director of Qdos Consulting, an employment status advisory.

Wednesday 16th April 2014