Renumeration clause in contract unclear

[rknrolls]

Does the clause below restrict my ltd company from paying dividends to myself? i.e. will my ltd company be enforced to pay tax + pay NI on ALL renumeration given the clause states “are treated as employment income for income tax purposes”?

I have quoted the clause below and the reply from my agency (middlemen / don't work for them) - I called and spoke to the agency and they maintain their ground that I should be able to pay myself salary (say £10K) + rest dividends despite this clause - I am not sure if this clause will allow me to do that! Newbie here hence appreciate any help! cheers

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Please note: Supplier = my limited company, Representative = me, Agency = employment agency in between me and the client

Now, the clause:
"obligations – payments & taxes - “4. The Supplier and Representative warrant and undertake that, (a) all remuneration (as defined in the Tax Regulations) made to or receivable by any Representative or Substitute in consequence of providing the Services constitute and are treated as employment income for income tax purposes”

Reply from my agency - “This clause and clause 5 have been included in order to address changes made to the Tax Regulations with effect from 6th April 2014. The clause obliges the Supplier and the Representative to ensure that all payments to the Representative in consequence of the provision of the Representatives services are by way of employment income, this would include all payments of salary, fees, bonuses, commission etc., but would in most cases exclude dividends, loans or expenses, as such payments are not generally considered to be in consequence of the provision of the services.”

[TheFaQQer]

It says that any remuneration (ie a direct payment to an employee for work) is taxed and subject to NI.

So, salary that you pay is subject to NI and income tax. Dividends aren't remuneration - they are a reward for risk.

Essentially what the agency mean is that your limited company is responsible for paying any tax / NI which might arise, not them.

[mudskipper]

It's a good idea to get your contract professionally reviewed, especially if you're intending to operate outside IR35 (which I assume from your question you are). B&C or QDOS are normally recommended.

[tractor]

Does the clause below restrict my ltd company from paying dividends to myself? i.e. will my ltd company be enforced to pay tax + pay NI on ALL renumeration given the clause states “are treated as employment income for income tax purposes”?

I have quoted the clause below and the reply from my agency (middlemen / don't work for them) - I called and spoke to the agency and they maintain their ground that I should be able to pay myself salary (say £10K) + rest dividends despite this clause - I am not sure if this clause will allow me to do that! Newbie here hence appreciate any help! cheers

==//==

Please note: Supplier = my limited company, Representative = me, Agency = employment agency in between me and the client

Now, the clause:
"obligations – payments & taxes - “4. The Supplier and Representative warrant and undertake that, (a) all remuneration (as defined in the Tax Regulations) made to or receivable by any Representative or Substitute in consequence of providing the Services constitute and are treated as employment income for income tax purposes”

Reply from my agency - “This clause and clause 5 have been included in order to address changes made to the Tax Regulations with effect from 6th April 2014. The clause obliges the Supplier and the Representative to ensure that all payments to the Representative in consequence of the provision of the Representatives services are by way of employment income, this would include all payments of salary, fees, bonuses, commission etc., but would in most cases exclude dividends, loans or expenses, as such payments are not generally considered to be in consequence of the provision of the services.”

In addition to getting the entire contract reviewed professionally, you should look up the term emboldened above. It is prescribed in the TMA I think. Google will find it for you.

[BlasterBates]

This clause is defined to avoid contractors in the public sector paying themselves dividends and avoiding NIC's. Remuneration means what you receive via the agency. That's what they mean.

It is restrictive but you could choose to ignore it. Not every clause in a contract is necessary legal, and you could use the legal argument that remuneration is what you choose to pay yourself, but that isn't how they mean it.

The thing you need to bear in mind is if they actually check up on this. If they don't you could ignore it, but if they do you might end up with a terminated contract.

I would take legal advice so you're aware of any consequences.

If I were to face a clause like that I would either accept I'm inside IR35 or turn the contract down, or get them to change the contract because the potential hassle of them checking up would be more than it's worth.

[ASB]

I think BB describes the intent.

However whether the clause is effective in attempting to implement that intent is a different matter.

It does not define the terms it is using. Remuneration as defined in the tax regulations. Which regulations ? There are many different ones, and doubtless many different definitions of the term within them.

It is poor drafting.

However, the OP has attempted to clarify. And the agent has indeed partially done this by restating it. However they do use the phrase "but would in most cases exclude dividends".

What is their idea of the cases which are not excluded? Clearly there are some.

[TheFaQQer]

This clause is defined to avoid contractors in the public sector paying themselves dividends and avoiding NIC's. Remuneration means what you receive via the agency. That's what they mean.

I disagree. The clause refers to "all remuneration (as defined in the Tax Regulations) made to or receivable by any Representative or Substitute in consequence of providing the Services...” - I read that as all payments made to the individual, nothing about what the agency is paying the limited company.

It's badly worded, but I think the intent was to make it clear that the agency isn't liable for PAYE or NI on any of it, it's the responsibility of the limited company to pay their employees properly, including all relevant taxes.

[rknrolls]

followups

It's a good idea to get your contract professionally reviewed, especially if you're intending to operate outside IR35 (which I assume from your question you are). B&C or QDOS are normally recommended.

thanks, I have already had my contract reviewed by QDOS via their IR35 assessment and they have reverted with a PASS. This specific clause is not mentioned or highlighted in any respect unfortunately e.g. under their sections of "control", "mutuality of obligation", "financial risk" or "right of substitution/personal service".

I will try QDOS with my question on the back of my IR35 assessment, I hope/assume question like this should be covered. If anyone has experience of engaging with QDOS on legal questions, please let me know!

In addition to getting the entire contract reviewed professionally, you should look up the term emboldened above. It is prescribed in the TMA I think. Google will find it for you.

Tried to hunt, couldn't find it unfortunately - as someone mentioned here "Tax Regulations" - not sure which exact ones they are referring to. I assume this is a question for my agency. In case you are aware of what this might be, please let me know.

... I would take legal advice so you're aware of any consequences.

If I were to face a clause like that I would either accept I'm inside IR35 or turn the contract down, or get them to change the contract because the potential hassle of them checking up would be more than it's worth.

any recommendations for legal advice? Would I go back to QDOS for this or my accountant?

My agency keep claiming they are not "legal experts" or "accountants" - this is fair enough. They mentioned they get their contracts written up by Lawspeed whom appear to be specialists in recruitment law.

thanks all, great to see a very helpful and active community here.

[TheCyclingProgrammer]

Terrible clause. I wouldn't sign it. It sounds like the agency doesn't understand what the new rules relate to and that they do not generally apply to Ltd company contractors.

[rknrolls]

hmmm..... my potential "to be" accountant just replied with a 1 liner - "Dividend income doesn't form part of your remuneration."

1) Can I take this as gospel?
2) If not, whom would be the definite authority to consult and go back to the agency with a solid reason to get the clause removed/changed?

Agency are adamant to see something from an accountant/legal stance from my end before the amend. I have moaned about this twice already.

I'll be happy to decline the contract on this clause but wondering whom I can get to back me officially.....

thanks all.