The press release on 23 September 1999 said that the IR35 rules would not apply to partners in large partnerships. What does this mean?
Ministers want to ensure that it is not possible for individuals who would meet the accepted definition of employees to use partnerships to avoid paying a fair share of tax and NICs, in the same way as service companies can be used today. But they do not want the new rules to place unnecessary burdens on partnerships which are not being used in this way.
What they want to do is to distinguish between partnerships which can be used by a worker to control the form in which income from relevant engagements is passed on to him or her, and partnerships which are legitimate businesses but may occasionally second a partner to work for a client in circumstances which might otherwise be caught by our legislation.
The IR35 rules will only apply to engagements which would fall within the definition of employment if the contract were between the client and the individual instead of the partnership. But in addition, they will only apply to partnerships where:
- An individual, or persons connected with him or her, is entitled to 60 per cent or more of the profits; or
- all or most of the partnership's income in the relevant tax year is derived
from the provision of services, in a form which would fall within the
definition of relevant engagements, to a single client or associate of
that client;
or
- the profit sharing arrangements in the partnership provide for the income of any of the partners to be based on the amount of income generated by those partners through relevant engagements.
If none of these three tests applies to a partnership, the IR35 rules will
not affect it.
Since the introduction of Chapter 9 ITEPA 2003 (the Managed Service Company
Legislation) on 6 April 2007 partnerships must consider whether they meet
the definition of a Managed Service Company. Partnerships that do meet the
definition must apply the MSC Legislation and treat all payments to individual
partners as employment income.
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