Taxation of controlling persons – IR35 part 2

by Laurie Anstis on May 24, 2012

It is proving to be a big week for employment law changes. On the same day as the Enterprise and Regulatory Reform Bill was announced, HMRC started consultation on the taxation of “controlling persons”. Whilst not directly concerning employment law, the HMRC consultation will certainly have an effect on working arrangements.

One of the features of the world of work in recent times has been the wide variety of contractual arrangements, apart from simple employment and self-employment, that have been adopted. Employment agencies, managed service companies, personal services companies, umbrella companies and various other intermediaries have all been used either separately or in combinations in the chain of contracts between a worker and the organisation that they actually carry out their work (sometimes called the end-user client) .

In 2000, HMRC took their first steps into this world in with the still-controversial “IR35” legislation. This sought to ignore the role of the various intermediaries, and charge PAYE tax and NI on the fees received if, disregarding intermediary organisations such as agencies, the relationship would be considered to be an employment relationship. Under IR35, the PAYE tax process was operated by the intermediaries themselves.

The new proposals, which are still very sketchy, look like being IR35 part 2. In the case of arrangements involving personal service companies (typically companies where the controlling shareholder is also a director and the only employee – but the definition will be wider than that),┬áthe new proposals will require PAYE tax and NI to be deducted by the end-user client before paying the personal service company or other intermediary. These new rules will apply where the worker is a “controlling person” – such as a director or other senior manager – of the end-user client.

Exactly how this will work has yet to be set out, but it does seem to have major implications for organisations which engage their directors or senior managers through personal service companies, as well as the workers themselves. The obligation to deduct tax will not apply to smaller end-user clients, and the final version of the legislation is likely to be complex, with extensive anti-avoidance provisions and rules on how to determine whether tax should be deducted or not.

The consultation closes on 16 August 2012.