IR35 and Sole Practitioner auditors
The Finance Bill 2013 includes a draft clause that seeks to extend the application of the intermediaries legislation (commonly known as IR35) to office holders when they are engaged via a third party intermediary.
The draft clause amends the part of ITEPA 2003 that contains the IR35 provisions. In particular the clause replaces Section 49 (1) (c) so that the IR35 legislation will apply where:
(a) an individual (the worker) personally performs, or is under an obligation personally to perform, services for the purposes of a business carried on by another person (the client)
(b) the services are provided not under a contract directly between the client and the worker but under arrangements involving a third party (the intermediary), and
(c) the circumstances are such that:
(i) if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client or the holder of an office under the client, or
(ii) the worker is an office-holder who holds that office under the client and the services relate to the office.
The new wording of (c) creates potential problems for sole practitioner auditors as they will be subjected to the IR35 provisions mainly because they could be regarded as an officer of a company if the contract was directly between them and the entity.
While HMRC has published guidance which would take auditors outside the scope of application of the provisions, the wording of the statute is clearly formulated and would not leave it open to taxpayers, who would self-assess on the basis of the legislation, to use a different basis of assessment on the grounds of non-statutory and transitory guidance. Quite obviously HMRC guidance cannot displace clear legislative provisions.
ACCA supports measures which tackle unfair tax avoidance but at the same time it considers it a matter of concern that the collateral impact of the new IR35 legislation will be the application of employee taxes to individuals who are clearly not employees, and should not be receiving employee benefits in respect of their activities.
ACCA is therefore making representations with the government to change the proposed clause so that it would explicitly exclude auditors from the scope of the intermediaries legislation. The representations hinge on a series of arguments that show how the draft IR35 legislation is inconsistent with other statutory and ethical provisions relating to auditors.
Part 16 of Companies Act 2006 in particular indicates that the auditor of a company holds office for that company during the term of their appointment. While Part 16 seems to imply that an auditor is an officer of the company, the question is not free from doubt as Section 1157 of the Act contains some specific provisions for a company auditor ‘whether he is or is not an officer of the company’. This section considers the power of court to grant relief in certain cases under the courts and legal proceedings section. However, other sections of the Act, including Section 1151, remove the auditor as an officer for a specific requirement and it can be argued that the not-an-officer clause exists for that specific purpose.
In any case Section 1214 in Part 42 of the Act lays down the independence requirements for an auditor stating that a person may not act as the auditor of a company if he is an officer or employee of the audited person. Subsection 5 of the same section nonetheless excludes the auditor of an audited person from being regarded as an officer or employee of the company for the purpose of Section 1214.
The statutory exclusion in Companies Act 2006 from regarding an auditor as an officer or employee of the company for the purposes of the independence requirements should also be adopted by the Finance Bill 2013 when applying the IR35 provisions to office holders.
For the purposes of the Insolvency Act 1986 an auditor has been held to be an officer in a number of court cases; however, each case stands on its own merits and could require judicial verification. In order to avoid interpretative doubts about their scope, some provisions in the 1986 Act are formulated to the effect of including officers and those who have been in the employment of the company, including those under a contract for services and not just under a contract of service. That is the case of Section 235, for example, that imposes a duty to co-operate with the company’s liquidator, administrator and others. Solicitors, accountants and other providers of professional services are included within Section 235 as employed under a contract for services and such formulation would also include auditors who are not officers.
The Financial Reporting Council’s Ethical Standards include detailed requirements in terms of auditor independence which, as well as including general principle-based rules, include specific provisions and prohibitions in respect of defined circumstances. In particular paragraph 37 of Ethical Standard 2 ‘Financial, Business, Employment and Personal Relationships’ sanctions that an audit firm should not have as a principal or employ a person to undertake audit work if that person is also employed by the audited entity.
The ethical provisions for auditors make therefore mutually exclusive the position of auditor with that of employee of an entity. Any other regulation, whether enshrined in statute or not, that purported an auditor as an employee of the audited entity would therefore be oblivious to the fact that the nature of the auditor’s work cannot be that of employee’s services. Additionally Ethical Standard 2 provides that the auditor shall not accept the appointment or perform a role as an officer (defined in Section 1173 of Companies Act 2006 as including a director, manager or secretary) or member of the board of directors of the audited entity.
The proposed IR35 legislation is also likely to affect the ability to obtain audit work by sole practitioners and many small practices, as accepting appointment as auditors would see them effectively discriminated for tax purposes with the likely result that sole practitioner auditors could be forced to abandon their practice. Such a result would constitute an unintended consequence of the proposed legislation and would also have a detrimental effect on the systemic audit offering and audit choice in the UK market, with a limitation that would adversely affect SMEs in economic terms as they maintain a strong reliance on small and medium sized practices as suppliers of audit services.
Such a point is illustrated by the latest figures published by the Financial Reporting Council’s Professional Oversight Board in its report to the Secretary of State for Business, Innovation and Skills. The report states that at 31 December 2011 the number of sole practitioner auditors in the UK was 3,806 out of a total of 7,376 registered audit firms, ie almost 52% of the total.
ACCA believes that a simple clause in Finance Bill 2013 – confirming that services performed in pursuance of an appointment as auditor in compliance with the Companies Acts are expressly excluded from the definition of ‘officer’ for the purposes of ITEPA – would remedy the potentially far reaching problems that the draft legislation may cause.