New rules to trump IR35
On 23 May HMRC issued a summary of its new proposals for the taxation of ‘controlling persons’ using intermediaries. This follows on from its Budget announcement in March stating that it would require office holders/controlling persons who are integral to the running of an organisation to have PAYE and NICs deducted at source.
The purpose of the proposed legislation is to prevent an individual from receiving a small amount of director’s remuneration from an organisation (referred to as the engaging organisation) but at the same time arranging for a larger fee to be charged by his personal company for services provided to the organisation. In many cases such fees are not subject to PAYE or NIC as they do not fall within IR35. This may be the case where, for example, there is a substitution clause or where workers provide their own equipment. A number of high profile cases have been reported in the press in recent months where government officials were paid through private firms rather than by a direct salary in order to mitigate tax.
The Government is proposing to create legislation which would require an organisation to place all ‘controlling persons’ on its payroll. This provision would place the responsibility of deducting the tax and NIC payments on the engaging organisation. ‘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’.
So as not to discourage enterprise, ‘micro businesses’ would be excluded from charge under the new proposals. A ‘micro business’ is defined by the EU as a business which employs fewer than 10 persons and whose turnover and balance sheet does not exceed €2 million (approximately £1.7 million). Micro businesses which are part of a group will not be able to benefit from this exclusion.
These proposals come two weeks after HMRC introduced business entity tests for IR35. It is proposed that the ‘controlling persons’ measures will run side by side with IR35, with the former taking precedence.
Perhaps the latest proposals are an admission by HMRC that IR35 is not robust enough to tackle tax avoidance. In any event, it seems strange that on the one hand the Government recognises “that IR35 can be difficult to understand” but at the same time further complex measures are introduced to run in parallel with IR35.
For further information please contact the TaxDesk on 0845 4900 509 and ask for Priya Dutta.