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Legal Eagle

Miscellaneous

Q: How does the IR35 affect actors/theatre companies?

I am a self-employed actor. Does the new taxation measure IR35 affect me in any way? What if I start a theatre company limited by guarantee?

A: IR35 takes its name from the reference number on certain Inland Revenue press releases in March and October 1999 as to the introduction of legislation subsequently enacted and taking effect from April 5, 2001. This was designed to counteract avoidance of tax and National Insurance contributions by individuals who, instead of entering into employment with someone requiring their personal service skills, charge out their services through a company which provides those services and receives payment for them without deduction of tax or NIC by the end-user.

This has certain tax and commercial advantages for the individuals concerned, e.g. possible payment of corporation tax at a lower rate than the tax which the individual himself would have to pay, better tax treatment of expenses, ability to distribute profits by way of dividend rather than director's emoluments with consequent avoidance of NIC, ability to pay director's emoluments to spouses or domestic partners with consequent personal tax mitigation, limited liability protection (although usually negated by insistence on 'inducement letters' or personal guarantees), enhanced ability to raise investment capital, ability to create a company pension scheme for the individual and his family, and improved cashflow.

IR35 enables the Revenue and the Department of Social Security to treat a worker who operates through a limited company (often whose sole function is to provide the services of the one particular individual concerned) as, in effect, an employee in disguise. They are therefore liable to be taxed under Schedule E and the PAYE system on the whole of the service company's remuneration for the provision of the individual's services and liable for NIC on such remuneration. A high payout rate in dividends by such a company may attract the attention of the Revenue and the DSS as possibly indicating a service company seeking to disguise employment.

On the other hand, the Government has recognised that there may be entirely legitimate and acceptable reasons for the use of a service company to hire out the services of a particular skilled individual, and IR35 emphasises that it is "aimed only at engagement with the essential characteristics of employment where these characteristics are disguised through use of an intermediary, such as a service company" and that "there is no intention to redefine the existing boundary between employment and self-employment".

You are self-employed, from which I assume that you are currently so treated by the Revenue, as indeed are most actors who are not permanently or semi-permanently employed by a resident stage company and who are engaged for short-term piece work and paid without deduction of tax by the party engaging their services.

You should not therefore be affected by IR35 if you carry on as you have been doing, that is to say as a self-employed individual. However, you may possibly find yourself in a situation where, for tax and NIC purposes, you are treated as self-employed for some engagements, and employed for others of a comparatively long-term nature. That is why both parties to a contract have hitherto often preferred to contract with or through a service company, so as not to have to struggle with a decision as to whether or not PAYE tax and NIC are to be deducted at source.

The implications of setting up a theatre company limited by guarantee are complex, and depend on what you would be trying to achieve by so doing.

Such companies are usually set up for charitable or non-profit-making purposes. Their relevance in the context of IR35 is to negate any possible argument by the Revenue or DSS that the dividend route is being used for tax or NIC avoidance, and thereby to improve the chances of IR35 not being applied, because a company limited by guarantee cannot, by its very nature, pay dividends.

I think in the present climate, if you have a history with the Revenue of having operated as an individual throughout your career to date, and suddenly change to operating through a service company of any description for no apparent reason, the Revenue and DSS respectively are likely to look very carefully at the tax and NIC effect of your so doing and consider how they might challenge any consequential tax or NIC mitigation.

That is not to say that there may still be no good reason for you to make the change, but the complexities involved are such that you should discuss the pros and cons carefully with your accountant or other tax adviser, before proceeding.

First published July 2001