Apr 292012

The 'IR35' tax legislation only applies in circumstances where an individual would have been an employee of a third party if there had been a direct contract. A non-executive director is an office-holder rather than an employee. Therefore, if the individual's only relationship with the third party is as a non-executive director then the IR35 tax rules will not apply.

There have been some suggestions that this position has been altered by the Income Tax (Earnings and Pensions) Act 2003, because Section 5 of that Act says that the provisions of the Employment Income Parts that are expressed to apply to employments apply equally to offices, unless otherwise indicated. However, Chapter 8 (the intermediaries legislation) is not expressed to apply to employments. It applies to services provided under arrangements involving an intermediary. It follows therefore that section 5 (1) of ITEPA does not bite, with the consequence that the word "employee" in section 49(1)(c) should not be read as applying to an office holder. Thus there has been no change as a result of the new Act.

The IR35 tax legislation may however come into play where other services, such as consultancy services, are also performed for the client through a Personal Service Company. In those circumstances the individual might have been both an office-holder and an employee, if the relationship with the client had been direct. Whether or not the legislation would apply would of course depend on the facts.

A non-executive director will be caught by the National Insurance regulations. This is because these regulations apply where an individual would have been an "employed earner" of the third party if there had been a direct contract. The term "employed earner" includes an office holder.

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