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Further to our message following the budget last week, we thought you might be interested as to why the tax loophole was closed. IR 35 extended to domestic workers and nannies The Inland Revenue renewed its crackdown on personal service companies by announcing a new anti-avoidance measure targeted at nannies, butlers and cleaners who offer their services through an intermediary. Domestic workers were specifically exempted from the Finance Act 2000 clauses that brought IR35 into effect. But the latest move is said to be the Revenue's response to the increasing use of service companies by domestic workers. Domestic services provided after 9 April 2003 will fall within the same IR35 provisions that affect IT consultants, journalists and personal service providers and will be subject to income tax. Domestic agencies that fall within the scope of the legislation will have to operate PAYE and pay NICs on any payments of salary during and may have to pay an additional amount of tax and NICs on a "deemed payment". National Insurance Contributions will also be due from both employer and employee, but for the first year it will be from different dates. After the Finance Bill receives Royal Assent, regulations covering NICs will be introduced, meaning that separate deemed payment calculations for the year ended 5 April 2004 will need to be prepared for income tax and National Insurance purposes. "This is the death knell for tax planning for nannies," said Smith & Williamson's Francesca Lagerberg, who recommended that domestic workers providing services through a limited company should disincorporate and return to a traditional employer/employee relationship. According to Lagerberg, the Nannytax payroll service in Brighton had built up a successful business as an intermediary, When it approached the Revenue to ask its stance if expanded the service nationally, officials became concerned that the practice might become more widespread. "This is a knee-jerk reaction that conflicts with the Chancellor's messages about child friendly measures," said TaxZone's Gary Mackley-Smith. "Since they are paying nannies out of taxed income, it's effectively double taxation, which is why the exemption was introduced in the first place." Many parents agree to pay a net rate to the nanny and make up the difference, so the new regime will increase their costs and it could extend the black economy. "If employers change to PAYE, there's little to prevent extra amounts from parents to the employee without going through PAYE," said Mackley-Smith. REV BN 9: Changes to Intermediate Legislation: Domestic Workers