The recommendations follow a review which was triggered after the media exposed a number of senior Government workers, including Ed Lester, head of Students Loans Company, who were receving their remuneration through limited companies in order to mitigate their tax. The Treasury has now reported that more than 2,400 people were paid 'off payroll'.
In this year's Budget, the Chancellor announced that he would introduce measures to have tax and NICs deducted at source if someone is 'integral to the running of the organisation'. This led to concerns among freelancer groups that a knee-jerk reaction against this so-called abuse, could catch 'genuine freelancers'.
As well as dealing with senior public sector workers, David Gauke, Exchequer Secretary to the Treasury, says in the introduction to the consultation document: "Equally we believe that where people are in a position to control the major activities of an organisation the organisation, 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 phraseology which is likely to become familiar in the coming months, 40 per cent of these 2,400 appointees had been engaged 'off payroll' for more than two years. Other key findings in the review show:
- Departments pay intermediaries, such as employment agencies, in around 85 per cent of cases, personal service companies in around 10 per cent and the self-employed in less than five per cent;
- over 40 per cent of those identified are IT contractors;
- the majority of those identified are paid on a daily basis, with around 70 per cent costing the appointing department more than £400 per day and over 70 cases costing Departments more than £1000 a day; and
- around one per cent of those identified have been engaged off payroll for more than ten years.
In summary, the Government is proposing to tighten the 'off payroll rules' within three months in the following ways:
- the most senior staff must be on the payroll, unless there are exceptional temporary circumstances.
- Departments will be able to seek formal assurance from contractors with off payroll arrangements lasting more than six months and costing over £220 per day that income tax and national insurance obligations are being met. Departments should consider terminating the contract if that assurance is not provided.
- this will be monitored carefully with financial sanctions for Departments that do not comply.
Chief Secretary to the Treasury, Danny Alexander, said: "The review has identified almost 2,500 off payroll engagements in central Government departments and their arm’s length bodies. The opaque nature of those engagements has created the conditions where tax avoidance could be taking place.
“We have to bring an end to the ‘don’t ask, don’t tell’ approach to this issue. That’s why I am announcing these new, tighter rules on off payroll appointments in Government and passing the detailed findings of the review to HMRC.”
The principle message from the consultation document is that the Government wants to "to ensure that where an organisation engages a controlling person the engaging organisation will be required to deduct the income tax (PAYE) and National Insurance at source, as they would for their employees".
Some commentators, including Shout99, have queried why the Government doesn't just enforce IR35 as it was intended to target this situation. The consultation document spends some time recounting the history of IR35, including the most recent development of the 'business entity tests' which are intended to assist with the administration of IR35.
It then proceeds to explain why, in the Government's opinion, IR35 legislation isn't enough for controlling persons and why this consultation seeks to go further.
One reason cited is that the Government wants the 'engager' to be aware of the tax status and obligations of the contractor if he or she is a controlling person. It says that this is not currently possible where a 'personal service company' is used.
The Government has concluded that "the most effective way to achieve the right level of transparency is for the engager to deduct income tax and National Insurance at source for payments they make to controlling persons in the same way as they do for their other employees and not to make payments direct to any PSC those controlling persons may work through for any other purposes. This requirement will provide the necessary assurances to the engaging organisation in a transparent way. It will also reduce the loss of the relevant tax and National Insurance to the Exchequer".
The measures would need to be underpinned by new legislation which would require the engaging organisation to place all controlling persons on the payroll. The document says that this provision would apply even where they might be working through a PSC for other purposes and even if the payments made by the engaging organisation were made to the PSC and not directly to the individual worker. In effect his means that the worker would be taxed in the same way as employees of the organisation.
The intention would be that HMRC would police the new provision through risk based employer compliance visits during which they would check that everyone who meets the definition of a ‘controlling person’ of that organisation was on the payroll.
This measure is intended to be targeted only at those who are able to influence the direction of the entity/organisation as controlling persons. The consultation document says that the Government does not intend to stop genuine commercial arrangements. But it adds that by placing the responsibility for deducting tax and NIC on the engaging organsation (unlike IR35 where it is on the contractor) will 'remove some of the incentive for engaging organisations to encourage workers to be engaged through personal service companies as they will no longer make the National Insurance savings'.
Much will depend on the definition of a 'controlling person'. The Government is proposing 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."
There was concern from freelancer groups that this could result in an overkill and affect some genuine businesses.
Stuart Davis Chairman of the Freelancer and Contractor Services Association said: “It is one thing for the Government to choose to shut the door on senior civil servants working as contractors, but quite another to suggest that contractors engaged in senior positions in private companies and organisations should be shut out too.
“As we have made clear many times before, there is nothing wrong or inappropriate for any organisation, including the Government to engage contractors at any level, if done properly, for the right reasons and where those concerned pay appropriate taxes. We would like to remind the Government and those who are criticising these arrangements, that freelance contracting work is undertaken by thousands of workers up and down the UK and is a legitimate and valuable way of working that benefits organisations and contractors alike.
“For a Government that is attempting to cut red tape and promote a strong and flexible economy, attempting to constrict companies and organsations in this way smacks of an extraordinary over-reaction to a barely recognisable problem. As the Chief Secretary said in his statement, IR35 exists to ensure that tax avoidance is not taking place and it is a gross insult to freelancers and contractors to suggest that just because they are not full time employees they are somehow abrogating their leadership responsibilities.”
The findings are outlined in the review and consultation documents.
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Susie Hughes © Shout99 2012