Revenue generated by employee by working for client

[thomast]

I am a limited company director with my contract outside IR35. I also have an employee (not a family member or relative) who just started now and works for another client, generating revenue for my limited company. That contract is inside IR35 not only because my employee's working practices are indicative of deemed employment but also because my employee can't claim to be 'in business on his own' when he is clearly employed by my company.

Majority of the revenue he generates is spent for his gross salary and employer's NI. The remaining is the profit for the company. The question is - should this 'profit' be considered as 'deemed employment income' under IR35 regulations or just as profit for my company from its consulting business.

I have asked other questions previously and I am thankful for the opinions many of you presented.

[SueEllen]

Employees aren't in the scope of IR35 as they have an employer.

Contractors who work through an intermediary for another company maybe.

If you don't understand this then get your accountant to explain this to you.

[TykeMerc]

I'm only speculating here as I'm neither an accountant nor a lawyer.

To me this sounds like your employee is working in the same way as if he was going via an umbrella company and IR35 is irrelevant in that case.
The profit your company retains over the costs of employing him is profit pure and simple, at least in my opinion.

[Contreras]

I am a limited company director with my contract outside IR35. I also have an employee (not a family member or relative) who just started now and works for another client, generating revenue for my limited company. That contract is inside IR35 not only because my employee's working practices are indicative of deemed employment but also because my employee can't claim to be 'in business on his own' when he is clearly employed by my company.

Majority of the revenue he generates is spent for his gross salary and employer's NI. The remaining is the profit for the company. The question is - should this 'profit' be considered as 'deemed employment income' under IR35 regulations or just as profit for my company from its consulting business.

In short, unless he a director or shareholder then IR35 simply does not apply and the contract is neither 'inside' nor 'outside'.

The profit is subject to CT of course, but not NI - that would be silly.

There's a clue in the (now defunct) P35 question:

The first part of the question should be answered ‘Yes’ if:

• an individual performed services (intellectual, manual or a mixture of the two) for a client(s), and
• the services were provided under contract between the client and the service company of which at any time during the tax year, the individual performing the services was a shareholder or partner, and
• the service company’s income was, at any time during the year, derived wholly or mainly (that is, more than half of it) from the services performed by the shareholders or partners personally.

[northernladuk]

I have asked other questions previously and I am thankful for the opinions many of you presented.

Maybe time to start speaking to your accountant so you can actually understand what you are doing?

[jamesbrown]

IR35 is about identifying disguised employment through an intermediary. If there's no question about an intermediary disguising the relationship as one of self-employment for a tax advantage, it doesn't apply. Here are the conditions of liability.

[WordIsBond]

If your employee owns less than 5% of the company's shares (as per the link in the comment just above), his work is not under any threat of IR35 liability, and any profit you retain is simply profit.

Not only do you not have to worry about IR35 on his work, his employment is a very strong indicator that you are running a business rather than a disguised employee and would make it very difficult for HMRC to argue that you are under IR35 on any of your own contracts, unless you do something really stupid.

If your employee generates 25% or more of your company's revenue, it would have been worth 35 points on the old Business Entity Tests, automatically meaning you were at low risk on IR35, which would have brought any investigation to a halt.

One of your contracts could still be "caught" under IR35 but it would be hard for them to prove it. "I'm not an employee, I'm running a business" is a strong argument in your case.

Because I passed it easily, I recently received legal advice to retain a copy of the BETs (and the evidence) as part of my IR35 defence dossier, even though they have been withdrawn. You might want to do the same. You could say, "I know the BET has been withdrawn, but 20 points was low risk and I took it and scored 50 points" (or whatever you score). The discussion would probably be over, they would go after an easier target that they might have a chance of winning.

The archived copy can be accessed here: https://www.gov.uk/government/public...s-entity-tests. A much more accessible summary is here: Business Entity Test - Contractor Weekly.

These tests were deeply flawed, but they still tell us a lot about how HMRC view IR35, and what they consider to be strong evidence of being in business for yourself rather than a disguised employee. If it works in your favour, you should use it.

[thomast]

If your employee owns less than 5% of the company's shares (as per the link in the comment just above), his work is not under any threat of IR35 liability, and any profit you retain is simply profit.
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These tests were deeply flawed, but they still tell us a lot about how HMRC view IR35, and what they consider to be strong evidence of being in business for yourself rather than a disguised employee. If it works in your favour, you should use it.

Thank you for your time and the informative and useful reply.