IR35 loophole closed

The IR35 tax rules are being extended to office-holders for the 2013-14 tax year onwards, reports Harris & Co chartered accountant. This change applies where a worker provides their personal services to a client via an intermediary to fulfil the duties of an office and the income for those services has not already been subject to PAYE/NICs as employment income.

For NIC purposes, the IR35 rules have always applied to office-holders, defined as directors (including non-executive directors) whose services are supplied to clients via an intermediary.

This is because office-holders are regarded as "employed earners" for the purposes of IR35 NICs" legislation. This continues to be the case.

However, prior to 6 April 2013, the IR35 tax legislation only applied to office-holders when a worker would also have been regarded as an employee if engaged directly by the client. Therefore, if the worker’s only relationship with a client was as an office-holder, then the IR35 tax rules do not apply for any services performed before 6 April 2013.

The IR35 tax legislation has now changed and office-holders are brought within IR35 for tax purposes for services performed on or after 6 April 2013 undertaking the duties of an office.

The amendment changes sub-section 49(1)(c) in Part 2, Chapter 8 of the Income Tax (Earnings and Pensions) Act 2003 for the tax year 2013-14 and subsequent tax years.

HMRC has published guidance on this change based on draft legislation published on 11 December 2012. However, it cannot be considered final until the Finance Bill 2013 receives Royal Assent (planned for summer 2013).