HM Revenue & Customs has issued a consultation paper setting out proposals to tighten IR35 compliance by requiring organisations engaging “controlling persons” through personal services companies to deduct income tax and national insurance from fees paid to their companies.
The consultation document fleshes out an oblique mention of the measure in the Budget 2012 document (para 2.207).
The new rule will be based around a new definition for “controlling person” that will be set out in the Finance Bill 2013. A controlling person will be defined as someone from the contracting organisation who is able to shape the direction of the engaging organisation during the year.
“This would be someone who has managerial control over a significant proportion of the organisation’s employees and/or control over a significant proportion of the budget of the organisation,” the consultation document explained.
The measure is intended to be targeted "only at those who are able to influence the direction of the entity/organisation as controlling persons. We do not intend for this measure to stop genuine commercial arrangements”, it added.
As well as placing administrative responsibility for deducting the tax and NICs on the engaging organisation, the new measure will also make them liable for the relevant employer’s NICs.
Tightening of the rules
Microbusinesses employing fewer than 10 people and whose turnover and or balance sheet does not exceed £1.7m will be exempted from the measure, because the burden on them would be disproportionate.
The new rules will be policed by HMRC through risk-based employer compliance visits during which they would check that everyone who meets the definition of a controlling person of that organisation was on the payroll.
The controlling person rule is a direct response to the controversies in Whitehall that followed revelations that more than 2,000 senior civil servants were engaged through personal services companies.
This group will be covered by a similar set of rules that will be brought into force in September 2012, ahead of the private sector changes planned for next year, Treasury minister Danny Alexander told the House of Commons last week as he announced the new measures.
“This proposed tightening of the rules will apply to any organisation, be it public or private. It is right that when an individual is in a position to control the major activities of an organisation, they should be on the payroll of that organisation,” he said.
The use of personal services companies in Whitehall “should be exceptional and unusual, and should apply only in particular cases, such as when there is a short-term shortage”, the minister commented, noting that 40% of the civil service contracts related to IT services.
Tackling tax avoidance
“There is an employee test under the IR35 rules, which I am told is simple and straightforward, and that should be sufficient for determining on which side of the line someone sits,” he said.
However, the impact of the Whitehall contractor scandal on IR35 reform is significant. When the government came into power, it acknowledged that the measure had become a burden on small, contracting businesses.
The rhetoric in both the Commons and the consultation document took a very different tone, with the mininister calling IR35, “a vital tool in tackling tax avoidance” that helps to ensure people pay the right amount of tax.
The controlling persons legislation and the Whitehall clampdown were part of the government’s commitment to “strengthen the IR35 regime”, Alexander said. Enforcement will be backed with resources to investigate cases caught out by the review or cases under IR35, he added.
The consultation period closes on 16 August, and asks for feedback on questions including:
- Is the measure proportionate?
- Does it raise commercial issues, or can you suggest alternative approaches?
- What are the consequences of this provision taking precedence over IR35 (Part 2 Chapter 8 ITEPA 2003) Part 2 Chapter 7 ITEPA 2003?
- Is someone who has managerial control over a significant proportion of the workforce and/or control over a significant proportion of the organisation’s budget the correct definition for a ‘controlling person’?
2 Responses
A Knee Jerk Reaction with Many Consequences
— Tony Evans (Director: the Institute of Interim Management: the UK’s dedicated body representing professional Interim practitioners – http://www.ioim.org.uk)
These proposals have enormous consequences for the way the whole industry works, not just the public sector, where the employer appears to not undertsand the interim concept and how to operate it.
The interim sector is a world leading industry for the UK. Given the Conservative party’s commitment to the simplification, if not downright removal, of ir35 leading up to the General election, what is going on?
This obsession with confusing commercial contracts with employment contracts, with confusing the lack of risk in the world of permamnent employment with that taken in setting up your own company; the careful forgetfulness of this difference as recognise for a generation in differences of tax treatment – is mind boggling!
Not to mention the attempt to treat a micro enetreprise (but still a compamny) differently from a larger concern. Not to mention treating interim srevice use so radically differently from ‘consultancy’.
And trying to ‘hook in’ ‘controlling persons’ could sytematically destroy the industry in the private sector. There is a reason things work as they do….
Get your own house in order first
HMRC have a cheek. They run an incomepetent organisation and to make up for that they spend their time coming up with ways to feed their pension funds etc.
A case in point came about yesterday:
I owe HMRC £35 in PAYE this month – every year they fail to send me a paying in book – so I have to call to request one on 0845 rates. They told me that it would take 3 weeks to send a book but I was advised to send the money in before it arrived with a covering letter. I said I would quite happily wait or use an old pay slip. They said that I may incur costs if I waited for THEM to send me the pay book and I should not use old slips as that would confuse their system. Did we go through the industrial revolution for this?
I must say I lose patience with public servants when you have to pay fines for their incompetence. Am I the only one that feels this way?