Personal service companies – a change of tack

Pat Dugdale

A welcome announcement this afternoon is that the Government will not be proceeding with its proposals to impose PAYE and NICs on all payments by organisations which engage office holders and other “controlling persons” through intermediaries. The proposals followed the discovery that the Chief Executive of the Student Loans Company and a significant number of civil servants were being paid through intermediary entities.

The IR35 regime was introduced 12 years ago to counteract PAYE and NICs avoidance through use of personal service companies. It applies where the individual would be treated as an employee of the client organisation in the absence of the intermediary and requires the intermediary to account for PAYE and NICs on most of the income it receives. It became apparent that a large number of high profile arrangements were being treated as falling outside the IR35 rules, several relying on a technical argument that office holders were not employees for IR35 purposes. The proposals published in May 2012 would have required engaging organisations to deduct and account for income tax and NICs on payments to office holders or other controlling persons engaged through an intermediary. The proposals were not generally well received; they would have shifted the tax risk from the intermediary to the client and there was uncertainty about the definition of “controlling persons”.

The Government says that it will instead tighten up the existing IR35 legislation to ensure that it covers office holders and will generally enforce it more rigorously. This is to be welcomed as it will presumably ensure that the tax risk remains with the intermediary rather than the engaging organisation. It is understood that the contracts of a large number of public sector workers have been reviewed and many are being moved over to employee status, a measure which will presumably increase the costs of the departments which now employ them but result in increased revenues for the Treasury. The  revenue raising nature of this measure is much more apparent in the private sector context.

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