Deductions at source planned for 'controlling persons'

HMRC 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.

“This 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.”

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.

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.

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.

Continued...

» Register now

The full article is available to registered AccountingWEB members only. To read the rest of this article you’ll need to login or register.

Registration is FREE and allows you to view all content, ask questions, comment and much more.

Comments

How many senior civil servants    1 thanks

exceljockey | | Permalink

can be defined as "controlling"? In my opinion very few and therefore this will have a disproportionate effect on the private sector.

Danny has his finger on the pulse then.....

justsotax | | Permalink

“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.”

 

 

johnjenkins's picture

He should

johnjenkins | | Permalink

be on Mcintyre's road show. Brian Rix and Co would have had fun with this one or the carry on team with "carry on desperately seeking creedance"

.

ireallyshouldkn... | | Permalink

Hidden in there is actually the gem of a sensible idea in terms of making IR35 compliance work, however.............only if it removes the burden from the contractor. Ie if there is no deduction they can just point at the engager and say "it must be outside, and if not its their problem, not mine" or would there be a big bun fight about who is liable for the tax?

Moreover if it is pushed up to the engager the exemption for "small" employers could mean the green light for to put all employees through a limited company?  Ie back to the debacle with the 0% band for limited companies...........

What a tangled web is being weaved here.

johnjenkins's picture

The problem lies with HMRC deciding    1 thanks

johnjenkins | | Permalink

who should be self-employed in whatever guise. This is only to generate more money for the tax coffers and not about who should be entitled to be self-employed. That is why IR35 will continue to be a farce until someone with a bit of common says "hang on it should be up to the engager and worker to decide status". Then Government can say what the tax liability is for self-employed or employed. This arguement will never go away and will only get more confused, the more HMRC try to make IR35 respectable.

frustratedwithhmrc's picture

HMRC should follow the ancient wisdom of the Dakota indians...    6 thanks

frustratedwithhmrc | | Permalink

johnjenkins wrote:

who should be self-employed in whatever guise. This is only to generate more money for the tax coffers and not about who should be entitled to be self-employed. That is why IR35 will continue to be a farce until someone with a bit of common says "hang on it should be up to the engager and worker to decide status". Then Government can say what the tax liability is for self-employed or employed. This arguement will never go away and will only get more confused, the more HMRC try to make IR35 respectable.

"The tribal wisdom of the Dakota Indians, passed on from generation to generation, says that when you discover that you are riding a dead horse, the best strategy is to dismount."

Completely agree @johnjenkins...

justsotax | | Permalink

the only issue for me is that if the engager decides that it is a self-employed relationship but then provides effectively employee benefits (pays holiday pay, sick pay, occupation pension - if possible via a ltd co) - of course i am thinking of contracting thru the public sector as I imagine this is the only place such practices (if possible) would take place.

johnjenkins's picture

@justsotax    1 thanks

johnjenkins | | Permalink

I see where you're coming from, but if you're self employed it doesn't matter if you get sick pay or holiday pay it's all taxable on the recipient. Pension payments would be treated in the normal way. What IR35 tries to do is take the LTD CO status away which in my mind is illegal. What would the government do if all business went on to a bartering system on a much larger scale than happens now? I saw Ken Clarke this morning saying that the governemnt had listened about the pasty tax. Pity they aren't listeneing to the OTS, the Accountancy world etc. etc.about IR35. Just as an after thought I have an Autotrail Dakota (motorhome) and I certainly wouldn't drive it if it was dead. Swap Monty Python's parrot for IR35.

PCG sbe useful here?

kiwilondon99 | | Permalink

 

this is the nonsense of nightmares

every Client will make arbitary deductions - despite having a contract with a Td Co provider -   +  with no guarantee these will be paid over to hmrc and appear on whose record !!!    [payment over will be another admin task/ compliance or fine,  for the Client ]

They will always decide to deduct to assist their own cashflow  !!

contractual - commercial nonsense.

so any contract between a LTd[IR35 ish] company and a client will become  ultra vires ??

maybe pcg should direct best efforts on this than to devise  business tests 

 

goodbye to small business employers [ those with  PG's to the bank should be shaking ],  cuts at co house - as a fall off of reg entities - although  LLP may be interesting now

 

will there be a law change to provide for unempolyment benefits [ between 'assignmnets' and other level playing field rule introductions ? ]

Suntree's picture

Can't be said any better

Suntree | | Permalink

[quote=justsotax]

“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.”

 

 

Says it all isn't it?

Video record IMHO shows Danny Alexander seemed to giggle at ...

dstickl | | Permalink

justsotax wrote:

“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.”

When I watched the BBC Parliament channel broadcast on the Statement, the Video record IMHO (in my humble opinion) shows Danny Alexander seemed to giggle at ... the point of making the above quote, which appears in "HanZard" record at [a few lines below 23 May 2012 : Column 1167]. 

Also video record IMHO shows David Gauke seemed to stare at ...

dstickl | | Permalink

Furthermore, where the "HanZard" record at [a few lines below 23 May 2012 : Column 1168] shows: 

Danny Alexander: I am grateful for the hon. Gentleman’s remarks about the BBC, which is useful information for the House to have before it. I say to him in all seriousness that the rules relating to this sort of case—the IR35 rules—were put in place by the previous Government, and we are seeking to strengthen them through the consultation we have today.  ... 

The same video record IMHO (in my humble opinion) appears to me to show that Treasury Minister David Gauke MP seemed to stare in a very pointed fashion at ... Deputy Speaker Dawn Primarolo MP!!! - who, if my memory serves me right, was a key Labour spokes"person" in the introduction of IR35!

johnjenkins's picture

We now have Cleggy    1 thanks

johnjenkins | | Permalink

doing a U turn on charities. With a bit of luck we might have a U turn on Euroland, the coalition (although my prediction is that the next parliament will be a 3 party coalition) IR35 and all the other crap that the government "think" we need. Perhaps we need a deduction from the contolling persons who knock out 10 kids and cost the country £50k a year.

 

SarahL2011 | | Permalink

 

  • Is the measure proportionate

No - this was in direct response to the Ed Lester issue and will penalise the private sector for the public sector's inability to follow current regulation (IR35). I neither like nor agree with IR35, but the regulation is there and compliance with it would not have led to this - and other highly publicised breaches - occurring. 

The definition of a 'controlling person' will be too hard to clarify, let alone monitor, and will no doubt lead to businesses using the big consultancy firms to fill their interim requirements rather than the independent 'one man bands'.

  • Does it raise commercial issues, or can you suggest alternative approaches?

Most senior interims operate their own businesses. This proposal seems to imply that they have to go on the payroll and therefore start accruing employment rights. If neither party wants this to happen then what are their options?

If I operate through a PSC (HMRC's definition) then how do I invoice the company I am doing senior interim work for? Do I invoice them the net or gross amount? How does VAT apply? 

  • What are the consequences of this provision taking precedence over IR35 (Part 2 Chapter 8 ITEPA 2003) Part 2 Chapter 7 ITEPA 2003?

There's going to have to be a very good definition of controlling person for this to work......

  • 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’

You could have an interim manager of a call centre picked up by this new legislation if control over number of people is a guideline - and yet they are unlikely to have any significant impact on the strategic direction of the organisation. I also don't think you can cover budgets as that could include some junior finance resource.

The only way this will work is if the 'controlling person' is someone with the title 'director' and who participates in Board meetings etc. I think that would unfairly penalise those individuals who specialise as career interims and run a business providing short term resource to those businesses who need it. They often have a very different skills set to those who will be brought in to run the business / department from a BAU perspective and have no intention of becoming an employee.

 

As someone has already said - IR35 is there, so use the legislation and if the Civil Service are not complying then make it an internal policy only that contractors over a day rate of X need to go on the payroll.

johnjenkins's picture

I really don't    5 thanks

johnjenkins | | Permalink

know why HMRC are trying to make something work that can't. You can twist it, add this, take out that, it still won't work. Why HMRC? I'll tell you why, because it's not right, it's illegal and the business world don't want it. Wake up government, allow employment status to be decided by the people involved, then tax accordingly. Much easier and no comebacks.

Why, oh why can't they just

NeilW | | Permalink

Why, oh why can't they just drop the farce, scrap the whole of IR35 and just make it clear in law that if an engaging organisation treats an individual like an employee then that is what they will get - including the bill from the taxman.

'Genuine commercial transactions' will still be unaffected.

 

Which large companies are they protecting here?

 

 

IR 35 - tax & NI    1 thanks

dmmarler | | Permalink

Remember, if we combine tax and NI then the whole IR 35 issue goes away ....  there will be no advantage in working through a limited company, other than those of limited liability.

I hope that some sense will break out soon!

 

 

National insurance

kim walsh | | Permalink

Surely this is the root of the problem.

No NI at all payable by anyone for anyone.

Tax be the correct rate targetted at the right legal persons.

No silly reliefs.

Grants to promote 'special growth' areas.

No problem.

Tom 7000's picture

IR35    3 thanks

Tom 7000 | | Permalink

If everyone ignores the law, the only answer is to change it. IR35 doesnt work. So why doesnt the office of tax simplification just scrap it, allow people to decide if they are companies or employees. If you are a company, No HR rights, pension, holidays etc etc, the price you pay.

 

If theres a fall in the tax take, theres an easy answer to that, just make small company tax 30%

OR IS THAT TOO SIMPLE

doh    1 thanks

The Black Knight | | Permalink

“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.”

 

I thought this was an indicator of risk (of an enquiry) not a test of self employment/employment?

Can these people not be found a job painting banana's or something?

I wonder what they have planned for small companies then?

Will it affect the price of a pasty?

 

danielgricks's picture

Human Rights    1 thanks

danielgricks | | Permalink

Being defined and protected by Employment Law the only true test on whether a person is an employee.

IR35 and these proposals try to create another definition without providing any employment protection rights.

Surely it is against a person's Human Rights to be taxed by the state as an employee and not to be protected by the state's employment protection rights?

 

its just crazy...    1 thanks

dominovision | | Permalink

So the controlling people will want +40% day rate, it's obvious.. who loses the taxpayer.. if they don't then the public sector won't be able to fill these positions... (no one in their right mind with the necessary skills would work for the payroll pay). So they will fiddle it and make junior jobs more senior... otherwise senior jobs will be filled by under qualified / experienced people (then we will get mistakes like ordering  aircraft carriers that cost more to cancel than build).

Stop using sticking plaster and cut the public sector budget by 25%.

Reduce personal taxes to a flat rate 20%, with a 10k starting threshold.

Corporation tax of 15% for companies with >50% of their total headcount or registered in the UK. 25% rate for those who don't not. 

IR35    1 thanks

edmundwright | | Permalink

Looking at what is suggested, it seems that there can never be a valid reason for a service contract, (in the private sector), BUT as pointed out above, this will not impinge on the civil service at all due to the limitations of "who is responsible". It rather makes one wish to do something vicious to Civil Servants who draft these clauses and the stupid politicians who really do not know what they are doing!!

Tom 7000's picture

But practically...    1 thanks

Tom 7000 | | Permalink

Hands up anyone who has a current client who says he is caught under IR35 and pays the higher taxes......

 

QED

chris.cpwtax.co.uk's picture

IR35    2 thanks

chris.cpwtax.co.uk | | Permalink

I have a client who is "embroilled" in one of these Govt sponsored webs.

A large company engages an employment agency, who operate a Master Vendor scheme and subcontracts "non standard" staff to specialist recruitment companies to fill unusual vacancies.

My client is "engaged" through the 2nd of the agencies, who insist that he operates through a Limited company so that they do not have to operate PAYE.  No Ltd company... No engagement.

All logic suggested that my client should be an employee of the large company, but has to operate through "the system.

should_be_working's picture

IR35-proof contracts

should_be_working | | Permalink

Yep, put the whip down HMRC, I think the old nag is truly deceased.

Shifting some/all of the risk onto the engager surely incentivises them even further to issue/accept IR35-proof contracts, and to engineer IR35-rebutting practices (e.g. actual 'substitutions')?

Might make things a bit easier by ensuring that both sides of the engager/contractor arrangement are fully 'on board'.

mydoghasfleas's picture

Impact    2 thanks

mydoghasfleas | | Permalink

I went straight to the impact assessment in the consultation document as I always want to know what the yield is to the cost.

Exchequer impact - Unquantified

Economic impact - This measure has no significant economic impacts.  Why bother with it?

Individual and household impact - This will have a negligible impact on a small number of individuals. All those this measure will affect are likely to be highly paid.  Again why bother?  Oh, I see, it's a witch hunt; it's the wealthy so that does not matter.

Equalities impacts - The proposal is expected to impact on highly paid individuals. No adverse impact on the equality of protected groups has been identified.  That's OK then, the wealthy have no protection and we are all about equality.

Impact on businesses and Civil Society Organisations (CSO) - There will be a small reduction in administrative burden on micro businesses/PSC where the engaging organisation will take on the responsibility of paying PAYE and NICs. The increase in administrative burden for the engaging organisation will be negligible as all qualifying businesses will already be operating a payroll system and so the changes needed are expected to be minimal.  Are we expected to believe this?  Any employer has enough problems with running a payroll, let alone another layer of unpaid policing. 

Any reference seeking to define a CSO seems to run out of steam before I get any understanding - a] what are they, b] what do they do, c] who pays for them?  It leaves me thinking the answers must be a] unelected bodies, b] proliferate, c] us.

Impact on HMRC or other public sector delivery organisations [PSDO] - This will have minimal impact – the provision will be policed by HMRC as part of its normal risk profiling and employer compliance checking activities.  HMRC will police this with its normal high standards.  What is a PSDO?  Have I been asleep and Newspeak been introduced, when I nodded off, the only PDSO was the Royal Mail.

Time for my Diazepam

 

VAT?

leon0001 | | Permalink

1. I wonder how many of these personal service companies engaged by "public sector" entities are supplying services amounting to more than £77,000 per annum? Have they registered for VAT? What if the "employer" can't recover the VAT?

Looks like there could be an even bigger mess if anyone looked too closely.

2. johnjenkins - I think you will find that creedance is a traditional terpsichorean activity of certain native Americans. Did you mean to mention credence?

 

would it not have been easier

The Black Knight | | Permalink

To state that it is not government policy to encourage such arrangements Full stop !

If the government do not agree with this then their departments should not use it whether it be the MOD or otherwise.

Perhaps a tax amnesty for secondary civil servants would be good, COP9 those that do not engage. Investigate the fibbers and close the tax gap!

New word minimisation

The Black Knight | | Permalink

Has the scope of HMRC's remit been widened as the con doc says £900M to counter avoidance, evasion and minimisation.?

johnjenkins's picture

@leon0001

johnjenkins | | Permalink

I was doing a war dance at the time so I might have got a bit stuck-mixed.

VAT complication

adjadj | | Permalink

I write as a IT contractor, I am not an accountant.

I think most contractors will be registered for VAT. If working for most of the year (my aim) then it is likely that gross revenue will approach/may exceed the the VAT threshold. It is thus sensible to be set up for VAT from day 1 as registering part-way through make life complicated for everyone including the client. So it is quite likely that these 'controlling person' rules will have a VAT complication!

I use the Flat Rate Scheme which is very simple. I spend 30 minutes a quarter to calculate and then inform HMRC online who then collect VAT due by direct debit.

@adadj - no VAT

The Black Knight | | Permalink

those caught will simply be returned to the payroll.

Payments will not be made to a PSC anymore.

So no vat implications other than a possible de-registration because of a cessation of trade.

CEOs of listed PLCs affected as well?    1 thanks

drakeltd | | Permalink

If a CEO/Chairman of a listed plc is engaged via their own Ltd Co then presumably the CEO would be caught by this new legislation. I can't see that going down too well!

I like dominovision's post re tax simplification. Succinct and with incentives. I would like to add that the headcount check should specify inter-company transfers as contributing to the Corporation Tax 25% category.

 

 

petersaxton's picture

Abolish NI?

petersaxton | | Permalink

dmmarler wrote:

Remember, if we combine tax and NI then the whole IR 35 issue goes away ....  there will be no advantage in working through a limited company, other than those of limited liability.

I hope that some sense will break out soon!

What about all the people with substantial investment income which will be subject to increased tax rates?

I wonder how much NI is generated? I also wonder what would happen if NI is simply abolished. There may be a substantial increase in employment causing a reduction in benefits. There would still be increased profits for employers and that would generate more tax revenue.

 

What about members of LLP's?

North East Acco... | | Permalink

Presumably they can influence the organisations direction etc.

Are they saying PAYE/NIC etc should be deducted from the payments to LLP members?

IR35 clowns    2 thanks

James RQL | | Permalink

I set up my own VAT registered management consultancy business in the mid 1990's to provide high end IT consultancy to major companies. This involved fundamental changes to the way they operated and running projects to achieve these changes. The project teams were made up of the company employees, including senior staff, so to that extent I was a "controlling person". I did not employ anyone in my own business but did bring in other consultancies when necessary, sometimes under sub-contract.

When Dawn Primorolo brought in IR35, all businesses like mine became potential targets for HMRC and I seriously considered shutting down my business altogether to avoid a ruinous tax burden. The measure effectively destroyed the self-employment initiative for many would-be contractors and self-employed specialists offering service based skills.

Since that time IR35 has not resulted in an improved tax take for HMRC, but it remains an appalling threat that hangs like the sword of Damocles over every contractor operating from within his own limited company. Government has become grossly oppressive because it now interferes in every aspect of our lives. The recent interest in IR35 has stemmed from public sector employees taking redundancy only to return to their old roles as contractors. This should never have happened - but if previous Prime Ministers can take multi-million pound sinecures as international political self-employed contractors what incentive is there in the internal public sector control system to prevent these lower level abuses?

Now the genuine independent contractor, running his own business and competing for work has been caught in the same net. The stupidity of the assessment rules now proposed is evidence of an arrogant and ignorant class of public servants who bend to the media winds like clowns. Unfortunately the joke is on the rest of us!

So much for cutting through Red Tape ...    1 thanks

mikewhit | | Permalink

I thought this government was all about reducing un-necessary layers of tax regulations.

We already have IR35, why is that not being pressed into service where it applies ? There is no need for any extra legislation.

The tax and NI deductions referred to would be part of the "deemed" payments regime.

Making those payments the responsibility of the 'engager' surely rewinds us back to the draft versions of IR35 which did place the burden on the client rather than the contractor.

Full circle ...

it didn't work though?

The Black Knight | | Permalink

mikewhit wrote:

I thought this government was all about reducing un-necessary layers of tax regulations.

We already have IR35, why is that not being pressed into service where it applies ? There is no need for any extra legislation.

The tax and NI deductions referred to would be part of the "deemed" payments regime.

Making those payments the responsibility of the 'engager' surely rewinds us back to the draft versions of IR35 which did place the burden on the client rather than the contractor.

Full circle ...

It didn't work though, because no one took any notice and it could not really be policed due to HMRC cuts and attitude. So the answer seems to be write some more legislation that no one will take any notice of again so some more legislation can be written and so on and so forth.

This seems to be standard procedure to any problem.

Just how much more unworkable and unused legislation do we need before someone realises that law is not effective unless there are sanctions.(first lesson in law was it not?)

 

petersaxton's picture

So true    1 thanks

petersaxton | | Permalink

It seems people are not qualified to work in government unless they are an incompetent fool.

Why should workers pay more "tax" than non workers?    2 thanks

Ken Howard | | Permalink

petersaxton wrote:

dmmarler wrote:

Remember, if we combine tax and NI then the whole IR 35 issue goes away ....  there will be no advantage in working through a limited company, other than those of limited liability.

I hope that some sense will break out soon!

What about all the people with substantial investment income which will be subject to increased tax rates?

Why should they get away with an artificially low "tax" rate.  NIC unfairly punishes the workers.  At a time when the country needs to start being more productive, increasing exports, etc., to earn our way out of such punitive debt levels, surely the workers should be incentivised.  If that means that those living off investments (i.e. not working or freeloading), then that's just tough.

It's not as if tax would increase by the same percentage as NIC.  It wouldn't surprise me if a combined new "tax" rate would be in the mid 20's range, say, 25%, because of all the extra revenue generated from investment income.  Change corporation tax/dividend taxation accordingly - i.e. small company CT rate of 25% and dividends with a tax credit of 25%.

The Govt could reintroduce a higher pensioner's tax allowance to compensate for the lower end of the pensioners income scale, such as those with total income under national average of £26k, say increase the age allowance to around £14k and no pensioner with income under £26k would be affected.  Those with incomes higher than the national average, should rightly pay more - after all, they're receiving more than workers and are above average earners, so that's hardly pushing them into poverty.

Reducing effective tax for workers from 32% down to say 25% would be a real shot in the arm to the economy and would help to alleviate the benefits trap when it's not worth working due to the drop in benefits and penal tax/NIC rates double whammy.

 

petersaxton's picture

Tax them until the pips squeak?    3 thanks

petersaxton | | Permalink

If you increased tax on people who live on investment income they will simply leave the country. You would then have to tax employed people to make up the shortfall.

"If that means that those living off investments (i.e. not working or freeloading), then that's just tough."

I am 60 now and I have worked since I was in my teens (except 3 years of study). I would have no qualms about selling up and leaving the country if the government targetted me for extra taxes.

Soon this country will be reduced to taxing benefits to pay for the benefits. I wonder how well that will work?

 

 

NIC contributions

The Black Knight | | Permalink

Yes CONTRIBUTIONS

to a fund (probably same coffer) but it pays out benefits, and pensions etc.

Do we want to grant investors with benefits too?

 

petersaxton's picture

The C stands for Contributions

petersaxton | | Permalink

NIC is a tax, no more or less. It's not put in a fund to pay out benefits or pensions.

Entitlement

The Black Knight | | Permalink

Does entitle you to benefits, pensions etc though?

petersaxton's picture

Yes

petersaxton | | Permalink

Yes.

Next domino

mikewhit | | Permalink

So just as the last government effectively banned Managed Service Companies (MSCs) hence forcing lots of nice compliant & legal taxpayers "out into the wild" (how many were still paying correct tax after that ?), does this government want to tax out of existence the profession of Interim Manager ?

For all the talk of being business friendly, this looks like Dawn Primarolo: The Comeback.