Contractors' Questions: Can I beat the NI relief ban for one-person ‘Ltds’?

Contractor’s Question: Having read about the tax relief removal for one-person limited company directors, I’d like to know if it is compulsory to be the sole director of a limited company for contracting purposes? If I still go ahead and use a Personal Service Company, what are the alternatives to be not being its sole director? Is being a co-director (or bog standard employee of the company) the way to go contracting tax-efficiently from April – when the removal hits?

Expert’s Answer: The government has published draft legislation which will deny the benefit of the NIC Employment Allowance to certain companies. There was a period of consultation; this has now expired but the results of the consultation (and therefore any changes to the draft legislation) have not yet been announced so the following answer should be seen in that light.

As it is presently drafted, the exclusion will not apply to a company unless the only NIC paid by the company is in respect of the remuneration of one single director. So one obvious way round the rules (as presently drafted) would be to appoint a second director or even an employee. However, simply appointing a second person is probably not enough.

To be safe, the company will need to become liable to account for some amount of employer’s NIC in respect the person’s remuneration. For an employee this could be a payment of remuneration of as little as £157 paid for just one week. Things get more complicated for a second director because of the special way in which NIC contributions are worked out for a director.

As to whether you have to be a director of the company through which you contract – no, you don’t, strictly speaking. Any company must have at least one director but it doesn’t have to be you: you could be just a ‘bog standard employee’. But please note that if you appoint a ‘stooge’ director who in reality acts under your direction, you are likely to become a shadow director of the company and to be treated for many tax and legal purposes as if you were a statutory director. So being a director in all but name is not recommended as a solution.

In summary, subject to seeing the final version of the legislation, appointing a second director or employee will be the simplest solution, provided it is undertaken with care.

The expert was David Whiscombe, tax technical director at BKL.

Monday 1st February 2016