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IR35 consultation – is it really necessary?
HMRC’s latest consultation aims to tackle its loss of tax from those working for an intermediary.
Last month we looked at HMRC’s new business entity tests for evaluating IR35 ‘risk’.
Hot on the heels of the publication of HMRC’s business entity tests comes a new consultation, aimed at tackling the perceived problem of loss of tax caused by workers contracting through an intermediary company, called The Taxation of Controlling Persons. The consultation is alarming and evokes memories of the ‘false self-employment in construction: taxation of workers’ of 2009.
Background
It has now been 12 years since the then Chancellor, Gordon Brown, introduced IR35 in an attempt to tackle the perceived problem of ‘disguised employment’.
Disguised employment, in this context, describes the situation where individuals provide their services through an intermediary company (or partnership or LLP) where the worker is, for all intents and purposes, an employee of the organisation using their services.
IR35 has been highly controversial ever since. However, the Government needs revenue and sees the loss of tax as a result of workers using intermediary companies as significant.
What does the new consultation say?
The consultation proposes that where there are contractual arrangements between an end-user client and an intermediary entity which is controlled by a ‘controlling person’, then PAYE tax and national insurance should be deducted by the end user before making payment to the intermediary entity. The consultation states that this would typically apply to personal service companies but could also apply to partnerships and LLPs.
For these purposes, a ‘controlling person’ is defined as someone who is ‘able to shape the direction of the organisation having authority or responsibility for directing or controlling the major activities of the engaging organisation during the year. This would include 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 states that the proposed solution to the IR35 problem is to create legislation which would require the engaging company to place ‘controlling persons’ on their payroll.
Exclusions
Fortunately, the consultation proposes to exclude micro-businesses from the proposals. For these purposes, a micro-business is defined as a business which has:
- turnover of less than 2m Euros and
- balance sheet total of less than 2m Euros and
- fewer than 100 employees.
Given these exclusions, it is difficult to see how much of an impact these proposals would actually have in practice and precisely what the target for them is.
The consultation poses the following questions:
- are the proposals a proportionate solution to the problem?
- do the proposals raise any commercial, employment or other issues?
- are there any alternative solutions other than that proposed by the consultation?
- what are the consequences of the proposals taking precedence over IR35 and the disguised remuneration legislation in ITEPA 2003, Part 2, Chapter 7?
- are there any circumstances where the proposals would prejudice genuine commercial arrangements?
- is the definition of a ‘controlling person’ within the context of the consultation document a fair one?
- should the definition of ‘controlling persons’ be extended? If so, why?
- should the definition of ‘controlling persons’ be narrowed? If so, why?
- is the exclusion for micro-entities proportionate?
- is there a case for not excluding micro-entities?
Let us have your opinions
The closing date for comments on the proposals is 16 August 2012. ACCA will be issuing its own response to the consultation in due course but if you would like to send us your opinion, please email us with your comments.