The beginning of the end?
Within his Budget speech on 16 March, Chancellor George Osborne announced a measure aimed at removing any tax advantage for those working on behalf of public sector organisations via a personal service company (PSC).
The term personal service company is not clearly defined, but it is commonly used to describe a business structure where there is an intermediary - commonly a company - which sells the work – the services – of an individual or a group of individuals and is owned and operated by the same individual or group of individuals. Frequently these will be “one man” companies.
PSCs have been on the radar of HM Revenue & Customs (HMRC) for quite a while, and effective from 6 April 2000 they introduced anti-avoidance legislation, known as IR35, to try and help combat the perceived tax advantages of operating as a PSC. HMRC frequently view these arrangements as being set up to avoid tax and NIC on what they view to be an employee/employer relationship rather than one of contractor/client.
Where a worker is engaged through the intermediary of a PSC, the intermediary needs to consider whether IR35 applies. Each contract or engagement is reviewed separately to determine the underlying relationship and employment status between the worker and the ultimate engager if there were not a PSC in between.
Whilst many people operating via a PSC are genuine contractors, there are those who, to all intents and purposes, are doing the same job as an ordinary employee. If this proves to be the case, the PSC must deduct the appropriate amounts of tax and NIC on the deemed employment payment. Essentially this means looking through the PSC so that the earnings from the engagement are deemed to be that of the actual worker.
However, despite the IR35 legislation being in place it was considered by HMRC that the rules were confusing. It was also believed that there was widespread non-compliance, which has been evidenced by reports in the press of civil servants, well know BBC presenters, and, most recently, thousands of Transport for London staff being paid via PSCs. Therefore, following the July 2015 Budget the Treasury announced a review of the rules “to improve the effectiveness of existing IR35 legislation”.
The Budget measure is the first move to increase compliance by moving the responsibility of determining whether IR35 applies from the PSC to the public sector employer, agency or third party that will be paying the intermediary. This will be effective from April 2017. Therefore, for one man companies the decision regarding the application of the legislation has gone from the worker, who is effectively also the PSC, to a third party who should be more objective.
HMRC have indicated that they will introduce clear tests to enable engagers to review whether these new rules will apply and then to also decide which engagements are actually caught by the new rules. There is also to be a new digital tool produced to give engagers a real time HMRC view as to whether IR35 applies.
For non-public sector engagements the IR35 rules will continue in their current form. Despite this, all businesses and agencies will have access to the digital tool, and this will therefore offer some degree of assurance to business owners as to whether or not they need to apply the IR35 legislation. However, this does perhaps suggest that, in due course, this measure will be expanded so that the IR35 compliance decision will be undertaken by all ultimate engagers rather than the intermediary PSC.
It will be interesting to see if the IR35 tool will provide a binding decision that can be relied on if HMRC dispute the conclusion reached by the engager. There is an Employment Status Indicator (ESI) tool available on HMRC’s website which when it first launched in December 2005 contained the caveat that it would only provide an “indication” of employment status and not a “definitive or legally-binding opinion”. The current (March 2016) version of the ESI indicates that HMRC will be bound by the ESI outcome provided that certain caveats have been satisfied and a PDF of the result saved. No doubt this issue as it applies to the proposed IR35 tool will be addressed in due course when the tool starts to be developed, which is to be in consultation with stakeholders.
This proposed new legislation does seem to indicate that HMRC are determined to continue to shutdown opportunities for anti-avoidance, and to ensure that there are no tax advantages to be gained from operating as a PSC as opposed to being an employee.
For help or advice regarding personal service companies and IR35, or any other tax matters, contact Carolyn Byrne on 01522 541181 or email firstname.lastname@example.org