During 2012 the Government consulted on the possibility of introducing new legislation requiring the most senior people engaged by an organisation, but not on the payroll of that organisation, to have income tax and NICs deducted at source through PAYE. Although it has subsequently been decided not to introduce such legislation at this time, the existing legislation governing personal service companies (known as the IR35 legislation) is to be tightened from April 2013. This will have an impact on individuals who hold an office (an executive or non-executive director) on the board of a company and are paid via a personal service company (PSC).
Increased compliance
Since April 2012, HMRC have been piloting a number of changes to IR35, including: strengthening their specialist compliance teams; altering the way they approach investigations; publishing new guidance to help contractors understand when and why IR35 applies and when and why it does not; and for those who want complete certainty, providing a free, confidential contract review service. As part of these improvements, HMRC have committed to a ten-fold increase in the number of cases this year where IR35 is the main risk.
Office-holders
At present, in order to establish whether IR35 applies, HMRC look at the underlying nature of the relationship between the worker and the engager - if the relationship would be considered to be employment, if it were not for the interposition of the intermediary, then the IR35 legislation usually applies. Where the legislation does apply, 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.
Historically, there has been a view that income received by a PSC does not fall within the existing IR35 legislation and is therefore not treated as employment income subject to PAYE.
What is changing?
From April 2013, the IR35 legislation will be extended 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 such cases, providing there is also a requirement for the personal service of the worker, the provisions bring into charge for income tax as the worker’s deemed earnings from employment, any payment made to the worker via an intermediary (third party).
From 6 April 2013, any payment to a PSC from a third party for the provision of an individual as an ‘office holder’ will be deemed to be employment income whether the PSC or the individual is registered as the office holder of the engager. This means that HMRC can invoke IR35 and seek recovery of tax under PAYE from the PSC when PAYE has not already been applied. This places office holders in the same position as contractors and other workers that currently have to apply IR35.
The Government has stated that if the change to IR35 and increased compliance outlined above prove to be insufficient to prevent people from attempting to avoid income tax and National Insurance by using intermediaries, it will return to its initial proposals requiring deductions to be made at source.
Practical Tip :
Anyone who holds an office on the board of a company, and who is paid via a PCS, needs to check before 5 April 2013 how the changes outlined above will impact on their business.
Sarah Laing
