Why does IR35 apply only to Personal Service Companies, not to sole traders?

[proudfeet]

It is hard for me to see in what way the client could get in trouble. They've entered into a business-to-business relationship with a company that happens to be in the UK, but they have no presence there.

They aren't under the jurisdiction of the UK authorities (unless they have a business presence here). Neither UK employment law nor UK tax law applies to them, nor could it.

UK tax law applies to you, but IR35 doesn't because it is 'intermediaries' legislation and there is no intermediary. If you form a Ltd then it will be an intermediary and IR35 would have to be considered. For now, there is no intermediary between you and the client.

If for some reason tax authorities were to deem you to be an employee of your client instead of a sole trader, and that you should be taxed accordingly, it would gain them nothing. Employer NI does not have to be paid on the salaries of UK employees of foreign corporations. So you would have to be NI on your salary (but you are paying it anyway) and you would have to pay income tax on it (but you are paying it anyway). So there's no reason for them to try to do that, and no comeback against the foreign client if they did.

I think you are worried about nothing here.

If the foreign client has a UK presence (an office or branch or subsidiary or something), that could change some of what I've written above.

Thank you, this makes a lot of sense.

I did consult an expert if anyone is interested. They generally agreed with what you guys are saying, and they recommended incorporation- they looked at my contract and said it was clearly a contractor role not an employee, so I would not be inside IR35. However they also mentioned that, as a sole trader, I perhaps should be paying income tax on the country that my client resides!

[Lance]

Thank you, this makes a lot of sense.

I did consult an expert if anyone is interested. They generally agreed with what you guys are saying, and they recommended incorporation- they looked at my contract and said it was clearly a contractor role not an employee, so I would not be inside IR35. However they also mentioned that, as a sole trader, I perhaps should be paying income tax on the country that my client resides!

Where do you do the work? If you do it in the UK then the expert is wrong.
I would also be concerned if an expert said ‘perhaps’. He is either is, or is not an expert, so he either knows or does not.

[WordIsBond]

Thank you, this makes a lot of sense.

I did consult an expert if anyone is interested. They generally agreed with what you guys are saying, and they recommended incorporation- they looked at my contract and said it was clearly a contractor role not an employee, so I would not be inside IR35. However they also mentioned that, as a sole trader, I perhaps should be paying income tax on the country that my client resides!

Was this expert an international tax expert, or an IR35 expert, or an employment law expert?

The last sentence makes me doubt that he's an international tax expert. If you are living and working in this country, you only owe tax to another country if you are a citizen of a country that bases income tax on citizenship, rather than residence. So unless you are of Eritrean or American citizenship that doesn't apply.

As to whether you should form a Ltd, I'd read up on IR35 and make sure you are completely satisfied you are outside. I'd also wait until the 'reform' taking place is actually legislated and we see what it says about foreign clients. Once all that is in the clear, if you are comfortable outside, then go for it. If you have a spouse, look into whether or not it would make sense to gift shares and appoint your spouse as a director.

If you aren't really convinced you would be outside, I'd probably just stay the way you are. Ltd Co taxation isn't THAT much better, and you do have extra accounting / reporting hassles. It's worth it but if you think you'd be taking a risk, then it might not be worth it. Figure out the numbers and how much you'd actually save (including if you have a spouse shareholder/director), and then decide if the risk is worth it.

I'd guess you are clearly outside and the risk is close to nil. Most contracts with overseas clients are.

[proudfeet]

Thanks chaps. Re. owing tax to the country of my client, there was some confusion- the dude mentioned this in passing before knowing of my UK tax residency. With UK tax residency it is not a problem.

As to whether you should form a Ltd, I'd read up on IR35 and make sure you are completely satisfied you are outside. I'd also wait until the 'reform' taking place is actually legislated and we see what it says about foreign clients. Once all that is in the clear, if you are comfortable outside, then go for it.

Very interesting. I'm a bit confused- I thought it was already legislated, and we know 100% what the changes will be in April 2020? Am I wrong?

[proudfeet]

Following on from my previous Q- if all the April 2020 changes are about is transferring responsibility from the PSC to the client- then I don't see how this could relate to me? Since

a) my contract clearly points to me being outside IR35
b) my client isn't even in the UK

Am I missing something? Basically I'm trying to understand if there is any reason why I should wait until April 2020 prior to incorporating.

[jamesbrown]

The legislation has not been enacted. If it goes ahead, as expected, it will be enacted some time after the Budget and come into effect on April 6.

According to the draft legislation, there is no difference, in principle, between a UK supply chain and an overseas supply chain, except that the Fee Payer is always the closest UK entity where one exists. Bottom line, unless something changes in the draft, then the overseas client completes an SDS and the overseas Fee Payer operates a deemed payment when inside. Obviously, it won’t be enforceable in practice, but that is what the draft legislation says.

As to whether you incorporate now or later, I would normally say this is largely orthogonal to IR35 status on one contract, but given the current uncertainty, I would wait until mid March, at which point there will be much more clarity.

[WordIsBond]

Am I missing something? Basically I'm trying to understand if there is any reason why I should wait until April 2020 prior to incorporating.

One scenario in which it matters.

Suppose you think there is enough IR35 risk to make you a little nervous. Suppose the legislation places entire responsibility on your client and none on you, even though that may be unenforceable. Now, risk is zero, right? Suppose the legislation places responsibility on your Ltd Co if the client is overseas? Now, risk is a little more significant, even if you think it is a low risk. Suppose the legislation places responsibility on you personally if the client is overseas? That might not be enforceable, either, but it would make the low risk even more significant.

Is the legislation likely to matter to you? Probably not, but does waiting a couple weeks to see what happens really matter that much? If we were talking about 6 months, it might matter, but 2 weeks probably doesn't. If it were me, I'd wait.

[rossb2]

Sole traders have no issues with ir35, and can claim expenses.
I predict that this will become an option for it contractors in the next year.

There is no limited liability with sole traders. Imagine a scenario where a client sues you, the insurance will not pay out. Next step, the client can come after your personal assets e.g house, car. I would be concerned about that.

[WordIsBond]

There is no limited liability with sole traders. Imagine a scenario where a client sues you, the insurance will not pay out. Next step, the client can come after your personal assets e.g house, car. I would be concerned about that.

Yes, before going that way you'd want to be pretty confident of your liability situation.

[Lance]

Yes, before going that way you'd want to be pretty confident of your liability situation.

You could have a liability cap included in the contract. And insurance to cover it.