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.
“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.
“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.”
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’?
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