Our submission and the consultation document are available in Adobe (pdf) format.
Background
The attached consultation document is HMRC’s response to the Budget announcement that:
‘The Government will introduce a package of measures to tackle avoidance through the use of personal service companies and to make the IR35 legislation easier to understand for those who are genuinely in business. This will include: strengthening up specialist compliance teams to tackle avoidance of employment income; simplifying the way IR35 is administered; and subject to consultation, requiring office holders/controlling persons who are integral to the running of an organisation to have PAYE and NICs deducted at source by the organisation by which they are engaged.’
In effect, income from certain ‘executive’ positions will be deemed to be employment income even if routed through a PSC etc. HMRC have previously stated that the purpose of this legislation is:
‘This provision will be a very targeted at office holders/controlling persons; the definition of a controlling person will form part of the consultation but it will be someone who is integral to the running of the organisation and has a degree of control over the organisation. By virtue of their position these people should be paying employment taxes on their income. If they are operating through a personal service company they would be subject to the IR35 rules. This measure will make it very transparent that people who hold these positions should be employees and that the engaging organisation should rightly pay the employer NICs and account for PAYE and employee NICs.
‘This measure will NOT target those who are genuine small businesses and does NOT replace the current IR35 rules.’
HMRC’s proposal is for the engager to be responsible for deducting and accounting for PAYE/NICs from payments in respect of the ‘controlling person’ (ie as IR35 was originally envisaged!)
The consultation document poses the following questions:
- Is creating a provision which would require the engaging organisation to deduct income tax and National Insurance at source a correct and proportionate solution to this problem?
- Does the proposed provision raise any commercial, employment or other issues that would need to be considered before any final conclusions are reached? If yes, please advise. [NB. Does it matter that this provision will not give any employment rights to these persons or is this irrelevant at this end of the market?]
- Are there alternative approaches that would better deliver the transparency the Government is seeking in the taxation of controlling persons than requiring them to have income tax and National Insurance deducted at source by the engaging organisation?
[NB. Would extending this provision to all ‘IR35’ arrangements make sense?] - What are the consequences of this provision taking precedence over IR35 (Part 2 Chapter 8 ITEPA 2003) Part 2 Chapter 7 ITEPA 2003 and all extra statutory provisions?
- Are there any circumstances where this measure would prevent genuine commercial arrangements? If yes please explain.
- Is someone who has managerial control over a significant proportion of the workforce and/or control over a significant proportion of the organisations budget the correct delineation for a ‘controlling person’?
[NB. How should ‘managerial control’ and ‘significant’ be defined?] - Should we extend controlling person to bring a larger group within the remit of this provision? If so who and why?
- Should controlling person be narrowed so that fewer people are within its remit? If so who should be additionally excluded and why?
- Is this exclusion [for micro businesses] a proportionate exception to the proposed provision?
[NB. Is the micro business exclusion needed? If yes, why?] - Is there any reason we should not exclude micro businesses, who are not part of a group structure from this provision?
Technical Team
16 August 2012
