New HMRC crackdown on PAYE tax avoidance and IR35, HMRC PAYE tools can be of benefit but HMRC PAYE helpline is inundated with requests for assistance.

New HMRC plans to increase PAYE and NIC by taxation of “controlling persons”

On the 23rd May HMRC published a consultation ‘The Taxation of Controlling Persons’. This is a proposal by the Government to ensure that PAYE and NIC is accounted for by ensuring all “controlling persons” at any firm to be on the payroll. This will apply to both the public and private sectors. The Government is effectively planning to ban the use of limited company contractors, particularly in situations where they would be acting as “controlling persons” in a business. HMRC’s intention is to increase the amounts paid for in PAYE and NIC and If the proposals in this consultation are approved, IR35then it is likely that any legislation would not come into effect for at least a year.

The Government has also laid down separate plans which will come into effect in September but affect only the public sector.

Why is the Government doing this?

These measures are widely thought to be a response to the case of Ed Lester, former Chief Executive of the Student Loans Company, who was engaged via his own limited company.
The Government believes “there is a lack of transparency around the tax arrangements of public sector appointees, where the worker is not on the payroll”. To translate this more simply, HMRC wish to ensure that PAYE and NIC amounts due to them are paid in full.

The Government argues that someone in a senior position should be an employee, and that senior officials who are “off payroll” are benefitting financially by these arrangements.

A Government review recommended that “the most senior public sector staff should be on the payroll” and paying PAYE and should not be engaged via a limited company or similar arrangement. The Government intends to ban “controlling persons” from being “off payroll” in the public sector by September. Quite clearly this tax avoidance of PAYE and NIC practice recently become more widespread, do not expect a great deal of assistance from HMRC as their PAYE helpline in inundated and there is a very long wait for calls to be answered.

However, they also want this practice to be prevented in the private sector. This is why HMRC has produced a consultation document to examine ways of putting this into law.

They state “we believe that where people are in a position to control the major activities of a firm then the firm, whether in the private or the public sector, should be able to have an assurance that the worker who is in a controlling position in the company is meeting their tax obligations.”
In particular, the Government is looking to pin down a definition of a “controlling person”. In a separate review of the public sector, published alongside this consultation, this distinction is based in part on pay (see “What about the public sector?” below for details). For the private sector, the Government has yet to decide how to define a “controlling person”

What’s happened to IR35?

The Government believes that senior individuals working “off payroll” are disguised employees. Though IR35 is intended to address the problem of disguised employment, but does not deal with the problem of “controlling persons” – i.e. senior and responsible individuals. The Government suggests that this practice has been increasing despite the presence of IR35, and therefore further legislation is needed.

The Government denies that this is an attack on “Personal Service Companies” (PSCs). They acknowledge that “there are many cases where the use of a personal service company is for legitimate commercial reasons. The Government is very supportive of intermediaries including personal service companies, and it does not believe that personal service companies are necessarily avoidance devices”. They also acknowledge that this is common way to engage specialist skills.

What is the Government Proposing?

The Government is proposing that new legislation is drawn up which requires “controlling persons” at a firm or organisation to be on the payroll, and not via an intermediary such as a limited company.

This would apply even when an individual uses his or her own limited company for other purposes.

“Controlling Persons” would effectively be taxed as employees of the organisation they are controlling.
Who will this affect?

The Government state “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 this measure to stop genuine commercial arrangements”

The Government propose that “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 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.”

If these measures are implemented, then this definition may need to be tested by case law to define what constitutes a “significant proportion” of an organisation’s budget or workforce. The Government have said on numerous occasions that this measure should only apply to the most senior individuals.

Working via an agency will not exempt a limited company contractor from these proposals as they currently stand.

Are there any exclusions?

It is planned that the measure will exclude “micro businesses” from having to ensure controlling persons are on their payroll. Micro businesses are defined as those employing fewer than 10 persons with a turnover of less than £1.7 million.

What will happen next?

These are only proposals at present. However, it appears unlikely that they will be dropped. There appears to be a political consensus on this issue, with all the major political parties condemning what “unacceptable tax avoidance” and disguised employment.

The presence of draft legislation suggests that proposals are in a more advanced stage than is typical for many early consultations. In other words, it is unlikely the Government will back off at this stage.

What about the public sector?

Measures to prevent disguised employment in the public sector will be implemented in September and are separate to this consultation. HMRC is clearly hoping to increase the amounts of PAYE and NIC paid to them.

Essentially any “off payroll engages” who are at Board level in the public sector, or those with significant financial responsibility must be on the payroll, unless there are exceptional circumstances. In such circumstances the Accounting Officer must “seek assurance” that the individual’s tax obligations are being met.

The right for the Government to “seek assurance” than an individual is meeting their tax/NIC obligations will exist in contracts for all other “off payroll” engagements which last over 6 months, and with a day rate of over £220 per day.

It is not clear what “seeking assurance” means – for example does this mean the individual would have to clarify their IR35 status with the department engaging them?

For “Off payroll” workers on £220 or less, but with contracts of over 6 months, it will be up to the individual Government Departments to determine whether it is worth seeking assurances.

Contracts under six months in duration will not be included in these proposals.
Workers on “off payroll” engagements in the public sector will still be subject to any new laws that emerge out of the Government’s wider proposals on “controlling persons” described above.

The use of an agency between the contractor and the Government Department makes no difference to their status as an “off payroll” worker.

Our Opinion

It is clear that the government intends to proceed with the taxation of “controlling persons” and intends to require such individuals to be subject to payroll taxes, IR35regardless of the legal nature of the contract between the parties involved.

However these proposals echo the original “personal service company” proposals before they became IR35. We are concerned about them as they appear to separate taxation from legality. Under these proposals, HMRC will be able to get all the tax and social security contributions it wants but in broad terms the quasi-employee will have no guarantee of the normal protections associated with employment. There is no direct link between taxation and employment rights but one has gone hand in hand with the other for decades.

We also recall that HMRC / HM Treasury tried something similar under the guise of so-called “False Self-Employment in Construction” in 2009. Given the number of times – and how badly – HMRC had lost on the issue of employment status in construction (such as IR35Castle Construction) then it seems as though HMRC believes it can ignore the courts and tax on its own terms. On that basis they will we believe they will be challenged.

We have a remedy for the above in the form of remuneration strategies that are within the law and highly effective in delivering high levels of tax efficient income and reducing PAYE and NIC payments whether you are “employed or self employed”. This is suitable for high earners and we understand not affected by the new legislation.

If you fall within this category, perhaps you would like to contact us?

Ray Best can help you protect your financial future. To find out more, simply click here!

About Ray L Best

Ray Best has had over 30 years experience of advising on complex financial matters. A published author of a number of books including “Partnership and Shareholder Protection”, Inheritance Tax Simplified”. We provide an initial meeting at no cost and only engage with clients when we can add significant value.

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