PDA

View Full Version : PSC - view for the bar



webberg
4th December 2015, 07:58
Tax loss, business and personal service companies | Waiting for Godot (http://waitingfortax.com/2015/12/04/tax-loss-business-and-personal-service-companies/)

This has just arrived in my inbox.

I've not yet had a chance to read it but the title appears to fit this thread so I thought it worth sharing, for the moment without comment.

In full

Reform of the taxation of personal service companies was top of everyone’s list of tips for the Autumn Statement. Reform was widely briefly. But “not yet” was the message. Although it remains on the cards it was not delivered by the Autumn Statement.

Most of what follows I wrote on the morning before the Autumn Statement. I had intended it to be a piece congratulating David Gauke, Financial Secretary to the Treasury, on delivering a much needed policy reform. Obviously I can’t publish that piece. But instead of adding ‘wasted my morning’ to (the bottom of) my (long) list of complaints about the Conservative Government I offer it, mildly revised, as an argument for the reform we need.

***

To understand why personal service companies are used you need to start with two important facts about the tax system and one about the nature of the employment relationship.

Tax Fact One

First, liability to operate PAYE – to deduct income tax and NICs from payments made to employees – rests with the employer. If the employer (call it ‘XCo’) doesn’t operate PAYE properly, XCo (almost always) carries the can. Even if the consequence of that failure is that the employee (MrY) is better off.

This has the important consequence that every time XCo engages MrY on a ‘freelance’ or self-employed basis XCo takes on risk that HMRC will, later, say that MrY was an employee, leaving XCo with a substantial bill for failing to operate PAYE.

Tax Fact Two

Second, there are lots of advantages for both XCo and MrY to MrY being self-employed.

Above a certain threshold (currently, annualised, £8,112), all income paid by XCo to an employed MrY attracts a 13.8% surcharge. Payments made to a self-employed MrY don’t attract that surcharge.

MrY is also – in cash terms at least – better off. On earnings of between £8,060 and £42,380 an employed MrY will pay NICs of 12% but a self-employed MrY will pay 9%. A self-employed MrY also enjoys a cashflow advantage – and a more generous regime for deducting his expenses.

And the advantages for XCo are not merely cash advantages. It gets to engage MrY with fewer (expensive) employment rights.

XCos are often prepared to share with MrYs some of their advantages in the form of higher pay to encourage them to agree to ‘self-employment’. Sometimes, properly understood, these arrangements are abusive and involve MrY undervaluing his employment law rights – and sometimes they don’t. Indeed, there are many cases where (for this and other reasons) MrY will not work for XCo unless he is engaged on a self-employed basis. There is no hard and fast rule.

Employment Fact

The one fact about employment is this.

If MrY has a direct relationship with XCo, he doesn’t get to choose whether he’s an employee or not. Whether he is or not depends on the proper legal characterisation of what he does and what his contract with XCo says. But if MrY is engaged through a personal service company (PSC) to supply his services to XCo he will almost always be self-employed. So XCo and MrY can transform what would be a relationship of employment into a relationship of self-employment by interposing a PSC between them.

***

The reasons for these tax differences – if there are reasons, and there might be – are poorly understood. I have explored them in some detail here. Many argue forcefully that they should be eradicated. For what it’s worth, for my own part I am not, or not yet, in that camp.

The reasons for the employment differences are also coming under some scrutiny: see Jeremy Corbyn’s speech at Party Conference here and my response here.

***

When in 1999 the then Government announced the introduction of IR35 its stated objective was to tackle the use by both engagers and workers of personal service companies to arbitrage tax differences: my Tax Fact Two above.

It sought to achieve its objective by, in effect, ignoring the interposition of a PSC between XCo and MrY. It asked whether, if XCo employed MrY directly he would be an employee or self-employed?

If the answer was “employed” XCo would have an obligation to operate PAYE (see Tax Fact One). And XCo would bear the risk of getting it wrong. At least, that was what was originally proposed.

But XCos didn’t like that risk and they lobbied Government furiously. And the then Government caved and put the liability on the PSC instead.

And that turned out to be a fatal error.

Because, instead of looking at a (relatively small) number of XCos, an overstretched and under-resourced HMRC had to undertake extensive and complex investigations into a (relatively large: tens or hundreds of thousands) number of PSCs.

And if they found a relationship that, ignoring the interposition of the PSC, looked like employment they had to challenge it in the courts.

And each of those cases would have no formal read-across to other PSCs: so HMRC had to litigate them case by case.

And very often, even when HMRC won, it couldn’t collect the tax. The PSC would simply wind itself up and MrX would start a new one. So common was this practice that it acquired a name: ‘Phoenixism’.

Meanwhile, XCo carried merrily on. It continued to have an incentive to engage MrY as self-employed. And so long as a PSC was involved – which the XCo insisted on – XCo enjoyed the benefit of the arrangement and took none of the risk.

And, so far as MrY was concerned, he too could carry on enjoying his share of the rewards. There was only a modest risk of HMRC enquiring – and if it did only a modest risk of any consequences.

***

The solution to this is remarkably simple. We need to revert to plan A.

The liability needs to rest on XCo. XCo will then show an interest in whether MrY really is an employee. And if he is, XCo will operate PAYE – and MrY will gain employment rights. As the system stands it fails to incentivise anyone to be interested in whether the right tax is paid. It really is as simple as that.

***

We are talking very substantial sums of money.

The best recent estimates suggest a population of 200,000 personal service companies (see paras 18 and 19 here) used particularly by workers engaged in the oil and gas and IT sectors.

If you assumed (a) average weekly earnings of £800 for those 200,000 and (b) all workers were self-employed, the difference between between Class 1 NICs (paid by the employed) and Class 2 and 4 NICs (paid by the self-employed) would be in the order of £1.2bn.

HMRC have provided an estimate of the difference between all Class 1 NICs (paid by the employed) and Class 2 and 4 NICs (paid by the self-employed) of £2.56bn.

And these figures are before the cashflow advantage and the benefit of the more generous deductibility regime.

Against that the population of MrYs who would be taxed under PAYE if engaged directly by XCos would be much smaller than 200,000. It may well be that a figure of around £500m would be of the right order.

However, it should also be noted that the creation of a new £5,000 tax free band for dividends could open up further and much more substantial opportunities for avoidance which exceed this £500m in scale.

cojak
4th December 2015, 08:06
PSC - what's that?

Only you and HMRC use it - it's a nonsense term that has been ignored by the rest of us.

Give it some legal standing, until that happens we'll continue to ignore it. Otherwise on tax forms it's a DOTAS like question that many of us refuse to answer.

LisaContractorUmbrella
4th December 2015, 08:32
Why do all these commentators, who have no real understanding of our industry, think that the answers are so simple??? Yes, in an ideal world clientco would make a fair and reasonable judgement on the employment status of a contractor but in the real world I can't imagine it will even come close to entering their minds.

Fred Bloggs
4th December 2015, 08:46
But, its complete and utter drivel and is simply wrong in a number of respects. I have requested IPSE make a response. It can't be allowed to go unchallenged.

webberg
4th December 2015, 08:51
But, its complete and utter drivel and is simply wrong in a number of respects. I have requested IPSE make a response. It can't be allowed to go unchallenged.

You can make your own response by going to the website (link above) and posting a comment.

Fred Bloggs
4th December 2015, 09:08
I know, but given who Mr Maugham is and his sphere of influence in Labour party policy formulation, a post by me would carry little weight.

Honestly, the man's ignorance of how a small MyCo works is shocking. No wonder we get 5hit economic policies if this is the kind of advice given to politicians

webberg
4th December 2015, 09:21
Not sure that's fair.

Maugham is usually reasonable.

A lot of the tax "advice" that is given to Corbyn and crew comes from Richard Murphy. Maugham and Murphy have clashed on a number of issues.

However, Maugham is listened to so this is your chance to influence him. Prove he is incorrect or misguided or dangerously off message or whatever. use the comment section on his website.

The whole point of a democracy is to have an opinion and share it.

I guarantee if you make no comment, nobody will hear it.

NotAllThere
4th December 2015, 09:30
AIUI phoenixing your company won't help, since IR35 liability is personal tax?

Fred Bloggs
4th December 2015, 09:47
Graham, generally, I agree with you about Maugham, however, on this occaision he simply doesn't know what he is on about. I will reply to him if I have to but I'd prefer a post from a party who carries some weight.

Regarding the point of the claimed tax avoidance by closing an IR35 caught company, I do not know of a single case where this has happened. If it has been done, HMRC have the power to re-instate a company anyway.

webberg
4th December 2015, 10:12
:eek
Graham, generally, I agree with you about Maugham, however, on this occaision he simply doesn't know what he is on about. I will reply to him if I have to but I'd prefer a post from a party who carries some weight.

Regarding the point of the claimed tax avoidance by closing an IR35 caught company, I do not know of a single case where this has happened. If it has been done, HMRC have the power to re-instate a company anyway.

In my experience Maugham is reasonable and if you think he knows nothing about the practical or economic impact of a structure that you have used and encounter regularly, you are the PERFECT person to correct him. A user of such companies with real experience of use/abuse carries far more weight than a tax/accounting adviser who may understand the theory and the effect of the law, but little of the practical impacts.

You may think you carry little weight but if his blog gets loaded with lots of people saying the same thing, e.g. you don't understand, then he will listen.

DotasScandal
4th December 2015, 10:26
You may think you carry little weight but if his blog gets loaded with lots of people saying the same thing, e.g. you don't understand, then he will listen.

Precisely.

I may not be in Mr Maugham's league but this hasn't stopped me from engaging him in conversation on more than one occasion. Generally I found he is quite open to alternative views.

I'm tired of people finding 9939475 reasons never to do or say anything, moan, and wait for someone else to take care of things.

TheFaQQer
4th December 2015, 13:24
IPSE have responded to the blog post via the comments section.

DonkeyRhubarb
4th December 2015, 13:57
From his responses to the comments on the blog, and other recent public mouthings off, Maugham strikes me as a jumped up, arrogant tw*t.

But then with a name like Jolyon what can you expect.

Just my opinion of course.

webberg
4th December 2015, 14:04
I see that Rebecca Bennyworth has contributed.

She is a very well respected moderate voice in the tax community and makes some valid points. Is she working for IPSE?

Otherwise, I think the more comments the better because if he is reasonable then it's worth giving him some matters to consider and if he fits Mr Rhubarb's view then he deserves a slap.

eek
4th December 2015, 14:37
IPSE have responded to the blog post via the comments section.

With the FLC proposal that the tax simplification people have already rejected....


From his responses to the comments on the blog, and other recent public mouthings off, Maugham strikes me as a jumped up, arrogant tw*t.

But then with a name like Jolyon what can you expect.

Just my opinion of course.

+1.... Mind you the IPSE response was little better...

LisaContractorUmbrella
4th December 2015, 14:45
I've also put in a response although it's not appearing yet. It was quite long :emb

Fred Bloggs
4th December 2015, 14:48
I see that Rebecca Bennyworth has contributed.

She is a very well respected moderate voice in the tax community and makes some valid points. Is she working for IPSE?

Otherwise, I think the more comments the better because if he is reasonable then it's worth giving him some matters to consider and if he fits Mr Rhubarb's view then he deserves a slap.Have you read what she posted at the end of her piece? If she is regarded as a sensible, moderate commentator, I don't want to read the extremists.

DotasScandal
4th December 2015, 14:51
Have you read what she posted at the end of her piece? If she is regarded as a sensible, moderate commentator, I don't want to read the extremists.

:eek:
THIS!

eek
4th December 2015, 15:01
Have you read what she posted at the end of her piece? If she is regarded as a sensible, moderate commentator, I don't want to read the extremists.

It's her viewpoint. Mine would be that as the only way we can work the way we do and not be utterly reliant on 3rd parties that we may or may not trust (remember umbrella's had a habit of going bankrupt last decade) is via a limited company then you need to resolve employment laws before you start complaining about the tax we pay.

DotasScandal
4th December 2015, 15:10
Personally, I find all this talk of "lost tax revenue" hilarious. It reminds me of the case the music industry was trying to make for itself in the heydey of P2P networks (Napster, etc.). They would come to governments begging for tougher laws, quoting a figure of $1295908695989008 in "lost" revenue (based on the price of a CD x the number of people that pirated it) - completely ignoring the fact that 90% of the pirates never would have / never could have purchased the item anyway had it not been available for free, and thus that 90% of the "revenue" would never have materialized under any circumstances.
Many tax specialists seem to think that contractors will just keep contracting, even as they are hammered with PAYE-level taxes & more. Keep dreaming! The second it is REALLY not worth the bother anymore, all but the most hardcore freelancers will occupy themselves with other, less risky ventures.
Or simply go practice their craft under friendlier skies. It's a vast world out there, and contractors are not irrational beings.

webberg
4th December 2015, 15:54
As is the theme of many of the threads here, the world of contracting is going to be different from April 2016. That process will accelerate when the IR35 "reforms" arrive (consensus is April 2017?).

The present business models are unlikely to survive. Or if they continue to be used, will result in higher tax bills for contractors and presumably higher contracting bills for clients.

The effect on tax revenues is an increase for HMG although perhaps not as much as predicted.

New business models will arise. I hear tales of the IPSE suggested FLC. From what I can see, that looks like a variant of the Family Limited Company/Partnership that a lot of wealthy families use to hold and trade business interests. (Forgive me if that is incorrect as I've not really focussed there as yet).

I fear that some sharks are already circling. I can see claims that a client paying an offshore entity which pays your offshore company will avoid the rules. No. I can see claims that payment in kind/shares/credit will avoid tax. No. I can see claims that Elvis has been spotted in Sainsbury's means no tax is due. No.

The more I think about this, the more I become convinced that some form of time based test will be used to determine whether, for tax purposes only, your income should be treated as business receipts or salary. I just feel that the S,D or C tests are just to flaky to be operated consistently.

I've already been asked to look at a partnership scheme where some profits are stored in a corporate member. I shared some of that and it got comprehensively shot to pieces based on practical operation.

There are perhaps other models waiting to launch. I'm sure a lot of tax advisers have their favourites.

Contractors may leave the UK but that probably means no longer working for UK resident companies. I suspect many contractors who have family and settled connections in the UK will not wish to leave. For them the simple answer (he's says reaching for tin hat) is to increase rates.

Waldorf
4th December 2015, 16:00
Personally, I find all this talk of "lost tax revenue" hilarious. It reminds me of the case the music industry was trying to make for itself in the heydey of P2P networks (Napster, etc.). They would come to governments begging for tougher laws, quoting a figure of $1295908695989008 in "lost" revenue (based on the price of a CD x the number of people that pirated it) - completely ignoring the fact that 90% of the pirates never would have / never could have purchased the item anyway had it not been available for free, and thus that 90% of the "revenue" would never have materialized under any circumstances.
Many tax specialists seem to think that contractors will just keep contracting, even as they are hammered with PAYE-level taxes & more. Keep dreaming! The second it is REALLY not worth the bother anymore, all but the most hardcore freelancers will occupy themselves with other, less risky ventures.
Or simply go practice their craft under friendlier skies. It's a vast world out there, and contractors are not irrational beings.

This is the same basis Corbyn's lot think about taxing the higher paid. They think that if there are 100,000 people earning £1 million a year, taxing them an extra 10% (or more) will raise £10 billion, not realising that people change their behaviour and so will depress enterprise and the government ends up losing money rather than raiding extra tax.

Fred Bloggs
4th December 2015, 16:06
For sure, the 90% crowd are having a field day and it will only get them more customers. For me, I've been contracting since 2003, rates have barely moved in that time. I can't see it happening now. For me, it depends, but semi retirement is looking favourite for me with perhaps some overseas work if I can get a decent enough rate (doubtful).

DotasScandal
4th December 2015, 16:40
For them the simple answer (he's says reaching for tin hat) is to increase rates.

:laugh:laugh:laugh:laugh:laugh:laugh:laugh:laugh:l augh:laugh:laugh:laugh:laugh:laugh

DonkeyRhubarb
5th December 2015, 09:37
This is the same basis Corbyn's lot think about taxing the higher paid. They think that if there are 100,000 people earning £1 million a year, taxing them an extra 10% (or more) will raise £10 billion, not realising that people change their behaviour and so will depress enterprise and the government ends up losing money rather than raiding extra tax.

There is a limit on the total amount of tax revenue that can be extracted. Increase taxes in one area, and you just reduce the amount collected in other areas. Historically, I think it's been an almost constant % of GDP.

Labour didn't get that in the 1970s and it seems none of them still get it.

ASB
5th December 2015, 10:14
There is a limit on the total amount of tax revenue that can be extracted. Increase taxes in one area, and you just reduce the amount collected in other areas. Historically, I think it's been an almost constant % of GDP.

Labour didn't get that in the 1970s and it seems none of them still get it.

very true. let us assume that rates go up to compensate. then this reduces profit by a commensurate amount and loses a broadly equivalent amount in ct.

it is difficult to increase costs on one sector without that eventually flowing through in same way to the consumers of that sectors output.

Zero Liability
5th December 2015, 11:02
Another person given to fabricating figures. His understanding of the area is abysmal. Why bother commenting? Especially this load of tripe:


However, it should also be noted that the creation of a new £5,000 tax free band for dividends could open up further and much more substantial opportunities for avoidance which exceed this £500m in scale.

If anything, this reduces the £400m pseudo-figure bandied about so often.

I mean you can go to the Daily Fail for this sort of shallow "analysis".

Fred Bloggs
5th December 2015, 11:49
There is a limit on the total amount of tax revenue that can be extracted. Increase taxes in one area, and you just reduce the amount collected in other areas. Historically, I think it's been an almost constant % of GDP.

Labour didn't get that in the 1970s and it seems none of them still get it.Ah, the much talked about Laffer curve, I believe.

Zero Liability
5th December 2015, 13:16
There is a limit on the total amount of tax revenue that can be extracted. Increase taxes in one area, and you just reduce the amount collected in other areas. Historically, I think it's been an almost constant % of GDP.

Labour didn't get that in the 1970s and it seems none of them still get it.

That limit is probably going to decrease over time, as well, as both capital and labour become more globally mobile, and blurred.

Cirrus
5th December 2015, 13:53
My forecast is tax will progressively get higher (7%+ on dividends already pencilled in for next year) and rates will get lower (except for scarce/niche skills). Contractors will be a lot less well off but there will still be a steady increase in the numbers, although those people who don't mind whether they are permanent or contract will be less drawn to contracting. I predict (despite the increase in contractors) there will be a continual fall-off in the number of contract roles with more and more positions being filled with foreigners on inter-country visas, offshoring and crowdsourcing.

DotasScandal
5th December 2015, 14:11
and crowdsourcing.

Guess you meant "outsourcing"?

TheFaQQer
5th December 2015, 15:53
My forecast is tax will progressively get higher (7%+ on dividends already pencilled in for next year) and rates will get lower (except for scarce/niche skills). Contractors will be a lot less well off but there will still be a steady increase in the numbers, although those people who don't mind whether they are permanent or contract will be less drawn to contracting. I predict (despite the increase in contractors) there will be a continual fall-off in the number of contract roles with more and more positions being filled with foreigners on inter-country visas, offshoring and crowdsourcing.

If rates get lower, there will be less inclination to use ICTs and off-shoring (unless their rates get lower too).

MPwannadecentincome
6th December 2015, 11:34
PSC - what's that?

Only you and HMRC use it - it's a nonsense term that has been ignored by the rest of us.

Give it some legal standing, until that happens we'll continue to ignore it. Otherwise on tax forms it's a DOTAS like question that many of us refuse to answer.

Sorry, how do you "refuse to answer"? the question is how much of your income was derived from a PSC (they stopped using a tick box last year or the year before?). By not filling it in are you refusing to answer or misleading HMRC?

Regarding a definition, I think if they really wanted to define it they would do it in a flash, even if they get it "wrong" and mistakenly include real companies who are not PSCs they will not really care. I can only guess that no definition exists to further the Fear, Uncertainty and Doubt.