After the furore created by the Ed Lester affair and recent media hysteria surrounding around 2,000 senior office holders of public bodies being engaged through their own personal service companies (PSC), HMRC last week published its consultation document, 'The Taxation of Controlling Persons'.
It was known that the consultation document was imminent as the government had announced it as part of its package of measures to tackle avoidance through the use of PSCs in this year’s Budget.
On 31st January 2012, the Chief Secretary to the Treasury, Danny Alexander, carried out a review into the tax arrangements of public sector employees to establish the prevalence of PSCs. The review concluded that there was a lack of transparency around the tax arrangements of those who did not show up on the payroll and, with this in mind, it was recommended that the most senior public sector staff be forced onto the payroll and that departments should have the right to seek assurance in relation to the tax arrangements of long term contractors.
HMRC believe that where people are in a position to control the major activities of an organisation, that organisation, be it in the public or private sector, should be able to have an assurance that the worker who is in a controlling position in the company is meeting their tax obligations.
In their Executive Summary, the Government states that it is “very supportive of intermediaries, including personal service companies as a cornerstone of developing business, and it does not believe that personal service companies are necessarily avoidance devices”. If only freelancers could believe and experience that!
The Government proposes to introduce new legislation that will 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 be that of the engager which the Government hopes will remove some of the incentive for organisations to encourage some workers to operate through PSC.
Micro businesses who engage controlling persons through a PSC will be excluded from the proposed legislation. A micro business is defined as a business that employs fewer than 10 persons and whose turnover and/or balance sheet does not exceed €2 million (approx. £1.7 million).
Definition of a controlling person
A controlling person will be defined as someone who is able to shape the direction of the organisation having authority for directing or controlling the major activities of the engaging organisation during the year. That person would have managerial control over a significant proportion of the engager's employees and/or control over a significant proportion of the budget of the organisation.
An example of a controlling person might be an individual who is installed as a Financial Director of an organisation. No longer would such a position be able to be filled by a contractor under these proposals but then what is significant managerial and/or budgetary control, 50.1%, more than this? How will this be measured?
It is intended that HMRC will police the new legislation by way of risk based employer compliance visits.
Closing date for comments on the consultation ends on 16th August 2012.
Yet another extension of the IR35 shambles for a whole host of reasons.
E.g. no thought has been given to expenses, so we now have the prospect of PSCs being payrolled and unable to claim expenses too. Fine if you live next door to the end client, not so good if you are at the other end of the country. So much for the flexible labour force.
The consultation paper implies that the legislation should not only apply to the public sector but also the private sector. Furthermore, it questions whether or not this should be extended to individuals with less control. So all those programme and project managers out there (myself included), beware.
And finally, “is meeting their tax obligations”. Without directly stating it, the implication we have here is that PSCs that pay dividends are tax dodgers, when the reality is, the vast majority simply follow the rules.
If the Government doesn’t like the outcome they should find some nuts and change them.
Does this apply to you if you make a donation to the CON party? If the tax system was fair FOR ALL and the means of collecting it was reasonable then there would be no reason for avoidance, other than greed of course, and unfortunately that is prevalent in todays society.
[quote name=”Geoff”]Does this apply to you if you make a donation to the CON party? If the tax system was fair FOR ALL and the means of collecting it was reasonable then there would be no reason for avoidance, other than greed of course, and unfortunately that is prevalent in todays society.[/quote]
As the CONS are the ones bringing it in then it looks like everyone is fair game.
It would be simpler though if rather than bringing in extra hoops, they just had the bottle to state that all single person entites should work under IR35. At least then we would all know where we stood.
So not only would it be the expenses that we would have to shoulder, we still would not be entitled to paid holidays,sick pay, training, employee benefits, bonuses, perks etc…
Welcome to the (effective) minimum wage bracket.
Perhaps I should get on the boards of a few blue chips/internationals/banks and receive a renumeration for doing sod all like our illustrious MP’s do!!
[quote name=”Graham”]It would be simpler though if rather than bringing in extra hoops, they just had the bottle to state that all single person entites should work under IR35. At least then we would all know where we stood.[/quote]
If you have a limited company and you want pay yourself under full PAYE, you can easily do it voluntarily without requiring any changes in the law. Then you will know where you stand.
I don’t think most contractors will thank you for encouraging HMRC to put us all under IR35. Is that really what you meant ?
[quote name=”Rick
I don’t think most contractors will thank you for encouraging HMRC to put us all under IR35. Is that really what you meant ?[/quote]
They are trying to do that anyway. That is clear from the consultation paper.
IR35 has failed miserably and now they are trying the cloak and dagger approach.
My point is that if they want the overall outcome to change they should stop pretending they are in favour of small businesses and a flexible workforce and have the courage to admit they want higher taxes. They can then change the legislation and we can all give our opinion at the ballot box.
OK, so I now cannot own my own Company because I’m a Contractor if I am to work for large organisations, which I do. OK so I’ll give my Company to the other half, or, can the dog own it?
All because those who do the actual work in government bypass all rules. We cannot stand together and boycott the government or else they’ll send the work offshore. Did they forget that in doing so the money is not recirculated into our economy?