Last week’s Autumn Statement announced, at paragraph 2.103, that 'The Government has decided not to proceed with the proposal to tax those who meet the definition of a controlling person at source.
This is because HMRC’s new approach to policing IR35, along with the measures introduced in the public sector this year, are sufficient to prevent the loss through disguised employment in this way. However, the Government is strengthening the existing intermediaries’ legislation (IR35) to put beyond doubt that it applies to office holders for tax purposes. The Government will keep this area under review.'
In May of this year, HMRC published a consultation document, 'The Taxation of Controlling Persons', which was borne out of the hullabaloo created by the Ed Lester affair and the recommendations from the review of public sector staff. It was proposed that legislation would be introduced in next year’s Finance Bill which would compel the engager to place all controlling persons on the payroll ensuring that that person was taxed in the same way as employees of the organisation. Unlike IR35 the responsibility for correctly applying PAYE and NICs would have been that of the engager which the Government hoped would remove some of the incentive for organisations to encourage some workers to operate through PSC.
The proposals were, however, criticised as being overkill and unnecessary, and especially after the recent rules introduced for public sector appointees.
IR35 Legislation
Unfortunately celebrations of the good news can only be short lived because of the announcement that the IR35 legislation will be tinkered, in an aim to address the anomaly of office holders being able to currently escape the clutches of IR35.
Duties performed as an office holder do not fall within the IR35 legislation, although NICs still apply to the fees received from such a role.
Chapter 8 of Part 2 of the Income Tax (Earnings and Pensions) Act (ITEPA) 2003 will be amended by a draft clause contained in Finance Bill 2013 that will extend the application of IR35 to office holders provided there is also a requirement for the personal service of the worker.
Whilst there is no statutory definition of the word 'office', there is a judicial definition that is referred to in HMRC's status manual as a 'permanent, substantive position which had an existence independent from the person who filled it, which went on and was filled in succession by successive holders.' Hopefully, HMRC will provide a substantive definition of what an 'office holder' is before the amended legislation takes affect from 6th April 2013, otherwise it will just add another layer of ambiguity to an already grey piece of tax law.
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