Although family or "husband and wife" personal service companies are not different from any other personal service company owned by a contractor, they are treated as a special case by HM Revenue and Customs.
How Does IR35 Affect Husband and Wife Companies?
This is particularly true if the objective of the company is seen by HMRC as being for the main earner to benefit from their spouse′s tax allowances. For example, a company owned fifty per cent each by a husband and wife might generate all its fees through the activities of just one of them.
However, because the husband and wife disperse income through their company, they both get the full benefit of their tax allowances. If the husband in this example was directly employed, he would pay the full rate of tax on his entire earnings, and his wife would not use her allowance.
The same principle applies for any company owned by close family members where the objective of the shareholdings is tax avoidance and in practice one member of the family earns all the money.
This topic is specifically covered by legislation known as Section 660A and affects not just "husband and wife" companies but also many family businesses. Click here to see our dedicated pages about Section 660A, also known as the "married couples tax".
IR35 allows Inspectors of Taxes from HM Revenue and Customs to make a judgement about companies of this type. HMRC can claim back taxes and National Insurance Contributions from past years of trading, going back up to seven years.
There have been a number of high profile test cases in the High Court (see case law) where HM Revenue and Customs have asked for tens of thousands of pounds of back taxes through applying IR35 to a "husband and wife" company.
HM Revenue and Customs lost the latest court case, leaving the validity of the legislation in doubt. However HMRC plan to appeal this decision to the House of Lords, so the "husband and wife" company may continue to be a target for the taxman.
The main organisations affected by IR35 are listed below; click on them for further explanations:
To speak to one of our tax experts call 0800 434 6402.
