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Less than a week after announcing in the Autumn Statement that the Government would drop its plans to have 'controlling persons' caught by the legislation, it has announced how it does intend to stop the practice which embarrassed Government Departments in the summer. (See: Political News for reports on the Autumn Statement 2012.)
This move can be attributed to a reaction by the Government after much criticism that many senior Whitehall and public sector personnel were being paid through their own limited companies (more usually referred to as personal service companies) to avoid tax and NI.
Without this amendment to the current IR35 legislation, an office holder would not necessarily be considered an employee of the client for income tax purposes. This change puts it beyond doubt.
However, the accompanying explanatory note makes it clearer that it is not as clear as it first looks.
In a sentence which will worry some freelancers, the Government says that the legislation will apply 'where the worker would be considered as an office holder of the client if the services were provided directly under a contract between the worker and the client.'
Leaving some wondering where the boundaries start and fall with workers who are 'considered' an office holder.
The explanatory note concludes: "This change equalises the tax treatment of office holders engaged through third parties with the treatment under the relevant National Insurance legislation, under which they are already in the same position as individuals who would be in an employment relationship if engaged directly."
The clause will pass through Parliament for debate as part of the Finance Bill before passing into law.
Draft clause
The draft clause in the Finance Bill says:
1 Arrangements made by intermediaries
(1) In Chapter 8 of Part 2 of ITEPA 2003 (application of provisions to workers under arrangements made by intermediaries), in section 49 (engagements to which Chapter applies), in subsection (1), for paragraph (c) substitute -
"(c) the circumstances are such that -
(i) if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client or the holder of an office under the client, or
(ii) the worker is an office-holder who holds that office under the client and the services relate to the office."
(2) This section has effect for the tax year 2013-14 and subsequent tax years.
Explanatory note from Treasury
Summary
1. This clause amends Chapter 8 of Part 2 of the Income Tax (Earnings and Pensions) Act (ITEPA) 2003 – the intermediaries legislation (commonly known as IR35) to extend the application of this chapter to office holders. Prior to this amendment an office holder would not be considered to be an employee so an office holder engaged via an intermediary would not come within this legislation.
Details of the clause
2. Subsection (1) replaces subsection 49 (1)(c) of Part 2 of ITEPA 2003. It extends Chapter 8 of Part 2 of ITEPA 2003 so that it applies to office holders when they are engaged through a third party intermediary. The extension applies both where the worker is named as an office holder of the client but paid through an intermediary and where the intermediary (third party) is named as the office holder of the client. It applies in each case where the worker would be considered as an office holder of the client if the services were provided directly under a contract between the worker and the client. In the situations described above, providing there is also a requirement for the personal service of the worker, this clause brings into charge for income tax, as the worker’s deemed earnings from employment, any payment made to the worker via an intermediary (third party).
Background
3. The intermediaries legislation in Chapter 8 of Part 2 of ITEPA 2003 considers the underlying nature of the relationship between the worker and the engager; if this relationship would be considered to be employment, if it were not for the interposition of the intermediary, then the legislation applies. Where the intermediaries legislation applies, the income received by the intermediary (third party) is deemed to be employment earnings of the worker and the worker is liable for income tax on it, calculated in accordance with Chapter 8.
4. This change equalises the tax treatment of office holders engaged through third parties with the treatment under the relevant National Insurance legislation, under which they are already in the same position as individuals who would be in an employment relationship if engaged directly.
Further information
Shout99 will be following this development closely and reporting all updates, reactions and analysis from the experts. You can keep up-to-date with this in 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 2012
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