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The new rules will come into effect immediately (from April 6, 2013) but need finalising in the Finance Bill which becomes law in summer after it has passed through Parliament.
The new rules are dealt with in Clause 22 in the Bill, which is quite appropriate considering it is meant to be something of a Catch 22 for freelancers who are integrated into their clients organisation as 'office holders'.
The objective of this first legislative change to IR35 in over a decade is 'to put beyond doubt' that certain types of contractors, namely office holders, are caught by IR35 for tax as well as Nics purposes. The genesis for it was severe criticism of the Government for allowing some of its senior public sector workers, like Head of Students Loans Company, Ed Lester, to operate through their own limited companies as a way of reducing their tax and NICs liabilities.
After considerable media pressure, they sought to put their own - and everyone else's - house in order. The tightened up their own guidelines for working with contractors, so much so that freelancer group, the PCG, are considering legal action against their actions. (See: PCG plans a judicial review against public sector contracting rules March 2013, Shout99).
Definition
The' office holders changes' is an attempt at stopping this practice further. The problem arises over the definition of office holders which is far from complete. In summary, it is a position which exists without a named individual and can be held by a successive number of individuals. This is by no means an exhaustive definition and one would be hard pressed to find one. Even the guidance notes admit their information is 'non-exhaustive 'this and cite case law dating back to railway companies in the 1920s. But, in summary, the background to the Clause says: " An office is a separate and independent position to which duties are attached; an office does not owe its existence to the incumbent or the discretion of an organisation."
For example, the background note explains, 'the post of manager of a factory or a head of division in an organisation is not an office because such a post will normally only exist as long as the organisation wishes. It will not have the independent existence or endurance required to establish it as an office'.
Confusion
However, initial reactions from industry and experts ranged from 'it was never necessary in the first place', through to it 'has added more confusion and uncertainty'.
The issue is further complicated by a previous lack of understanding of the detail relating to the differences between tax and Nics. As HMRC points out, the change applies for tax purposes when a worker is an office-holder or performs duties arising from an office. The other rules relating to IR35, including when the IR35 Nics rules apply, are unchanged.
With echoes of Catch 22, rather than Clause 22, the HMRC guidance explains:
- " For example, a non-executive director who also provides consultancy services to an organisation will always be subject to IR35 for NICs and will be brought under IR35 for tax from 6 April 2013 when performing their duties as holder of the office of non-executive director. However, IR35 will not apply to the consultancy services, unless they are provided in circumstances when the worker would be regarded as an employee if they had been engaged directly by the client."
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"What a lot of people seem to be missing is that office holders have always been ‘caught’ by IR35 for NIC purposes, which will make up the bulk of the difference between being inside or outside of the legislation. Clause 22 is simply bringing the tax in line with the NIC. It would be interesting to know how many office holders have been ignorant to the rules that already existed; obviously the potential financial risks for them would be far higher.
"In reality, the amendment to the legislation is likely to affect only a very small proportion of limited company workers and ‘typical’ contractors, i.e. IT consultants, shouldn’t have anything to worry about."
Guidance notes
HMRC has released guidance notes to correspond with the publication of the draft clause.
It cites the duties of an office including when:
- A worker is personally appointed to perform the duties of an office.
- An intermediary is appointed as a corporate office-holder, provides the worker to perform the duties of that office and the worker’s personal services are required.
- A worker is engaged both as an office-holder and to perform other duties in circumstances when they would be regarded as an employee if they were engaged directly by the client. (For example, a director also engaged as a CEO who has some duties arising from their office but in addition has managerial duties whereby they are mainly responsible for the client company’s day to day activities).
- A worker has earnings from an employment that have already been subject to PAYE/NICs by a client but they are also engaged by that client as an office-holder. (For example, the salaried Chief Financial Officer of a charity who is also engaged as a director of the charity).
These new rules do not apply:
- simply because a worker is a director of their own personal service company;
- nor just because their job title refers to them as an 'officer' but they do not hold an office
- nor when a company engages another firm as auditor and there is no requirement for an individual’s personal services.
Further information
Shout99 has followed this subject closely and reported updates, reactions and analysis. For more information, see our News on IR35 Section. You can also subscribe to free email alerts when new items appear in this section, so you won't miss out on any important development.
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Susie Hughes © Shout99 2013
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