Osborne moves against executive-level PSC users
The UK’s most senior interim professionals face a ban on being personal service companies at the organisations engaging them, under plans for a sort of ‘executive-level’ extension to the IR35 regime announced in the Budget yesterday.
In a move responding to Student Loans boss Ed Lester, and other top-tier professionals who avoid full tax as PSCs, the Treasury let on that it wants engagers to automatically levy PAYE & NICs to “office holders who are integral to the running of” their organisation.
Likewise, “controlling persons” – presumably CEOs and others who have a controlling influence over the organisation (so not normal service contractors), must have the employment taxes deducted at source by the engager, officials said.
Although the requirement facing both parties (controlling persons and office holders) will be subject to consultation, the effect would be to make PSC usage by such individuals prohibitive, even if they were a limited company before they approached the organisation.
Put another way, what happened to Mr Lester – an imposed switch from a PSC paying tax at about 20% to a payroll employee paying tax at about 40%, could become the norm for any senior interim deemed ‘office holder’ or ‘controlling person’.
“Deeming provisions will hit first,” the firm warned of the proposal. “So if HR says ‘we need a CEO’ they would have to put the individual on the payroll straight away, irrespective of how they came forward, whether it was through a recruitment agency or their own PSC.
“They would also have to pay the employers’ NIC too… [and while] this is a new development which is subject to consultation, the consultation is scheduled for the ‘Spring,’ so it could come in fairly soon.”
The Freelancer and Contractor Services Association is alarmed at the proposal, buried in Chapter 2 (.207) of the Budget report, saying it represents precisely the kind of move that its member companies, notably Parasol, warned against.
“We are very concerned at the government’s plans to require office holders or controlling persons who are integral to the running of an organisation to have PAYE and NICs deducted at source by the organisation by which they are engaged,” said the association.
“We believe this is the government’s attempt to try to prevent senior civil servants from legitimately working as freelancers and contractors as recently highlighted in the media.
“The government plans to consult on their plans which is welcome, but already we believe this demonstrates, once again, how the government has a complete lack of understanding of the flexible workforce.”
That perceived lack of understanding from the state is echoed by accountancy firm PKF, which says applying employee taxes to workers ‘integral’ to their organisations was widely “understood” to “already [be] HMRC policy.”
Yet for the vast majority of contractors, the government’s current wording of the proposal, due to be passed into the Finance Bill 2013, is likely to leave them unfazed and untroubled.
Simon Dolan, founder of SJD Accountancy, reasoned: “It won’t be possible to successfully argue that a single contractor in an outfit of even 100 people, let alone 100,000, is ‘integral’ unless they are a director (or a controlling party).
“I think it’s fair to expect that a ‘Chief Executive Officer’ or ‘Chief Technical Officer’ will be defined as a ‘controlling person’, and the consultation should address this so it becomes clear. Though as it’s currently framed, I don’t think most contractors will feel too threatened.”
However some will feel confused. Or at least, says Brookson - another contractor accountant, the state consulting on contractors in controlling positions for companies and looking to impose on them PAYE and NICs at the client-end, will cause confusion.
Managing director Martin Hesketh argued: “The [announcement] around office holders and controlling persons is clearly a political knee-jerk reaction and flies in the face of the principles brought in with IR35.
“Such confusion will be worrying for our customers who are genuinely self-employed professionals and who shouldn’t feel as they could be labelled as ‘tax avoiders,’ at a time when they are getting on with helping to grow the UK economy.”
Unfortunately the chancellor seems to disagree – and not just mildly because, as well as the move against senior management using PSCs, he yesterday announced a cap on income tax reliefs which seems to stop the self-employed from offsetting losses.
The Chartered Institute of Taxation said: “Although the draft legislation is awaited it appears from the Budget papers that it will apply to all income tax reliefs that are currently uncapped [from April 6th 2013].
“This would therefore appear to include genuine commercial losses made by a self-employed individual running an unincorporated business…we hope that they [the government] will ensure that it does not.”
More welcoming, albeit with qualifications, the institute pointed out that Budget 2012 takes forward a GAAR, as CUK anticipated in January, in the format outlined by Graham Aaronson QC.
“We think the government is right to press ahead with a narrowly-targeted GAAR aimed at truly artificial schemes,” said CIOT’s tax director John Whiting.
“We welcome the recognition in the announcement that a key need, as we have always said, is for the rule to be practical and certain for taxpayers and HMRC.”
This recognition is partly reflected in the GAAR’s name change: it was re-christened in yesterday’s Budget as the ‘general anti-abuse rule,’ whereas before it was the ‘General Anti-Avoidance Rule.’
“If this is a statement of intent,” reflected PKF, “then it is to be welcomed as it indicates that the government intends to keep the checks and balances recommended by the Aaronson report.
“A consultation will commence in summer 2012, with a view to bringing forward substantive legislation in Finance Bill 2013.”
Further anti-avoidance measures will be introduced in relation to VAT, to ensure anomalies in the system are corrected, such as those that cause very similar products to be treated under Value Added Tax differently.
The “detailed” consultation, scheduled for publication shortly, will set out a “broad range of options for the operation for employee, employer and self-employed NICs,” the Treasury said.
Turning away from one motivation for the merger - tax avoidance - condemned yesterday by Mr Osborne as “morally repugnant,” the department’s officials said they planned to create a simpler and more sustainable system for taxpayers to use.
From April 2013, then, up to three million unincorporated businesses with turnover up to £77,000 will save time by being handed a new cash basis for calculating and administering their tax, allowing them to forego full accounts.
The following year, 20 million taxpayers will receive a new personal tax statement, detailing for the first time the income tax and NICs they have paid; their average tax rate and how they contribute to public spending.
An even greater chunk of the population will benefit from one of the coalition government’s Lib Dem-inspired announcements – an increase in the amount of money that can be earned tax-free (to £9,205 in 2013/14).
However Nick Clegg and his followers paid the price later on in the Commons, notably when the chancellor confirmed the Budget’s worst-kept secret – the 5% shaving to the 50% tax rate.
“From April next year, the top rate of tax will be 45p,” Mr Osborne said. “No chancellor can justify a tax rate that damages our economy and raises next to nothing. It is as simple as that.”
Less straightforward to fathom, at the time, was his follow-up claim that the wealthiest individuals on the additional rate will, overall, soon be paying five times more money to the exchequer each and every year.
Initial calculations suggest that Mr Osborne’s claim is based on the highest-paid facing increases in stamp duty (most sharply where they buy properties via companies), and the capping of unlimited tax reliefs.
The paring back of child benefits from January 2013 for middle-income households will also contribute to the Treasury’s coffers, as will barring £100k earners from the upturn in the personal allowance.
While popular with some taxpayer groups and unions, these announcements combined with the chancellor’s move against senior professionals who operate through PSCs, and his all-clear to the new IR35 rules, clash with his Budget boast to be ‘rewarding work’, “aspiration, [and] those who want to do better for themselves.”
“No country will value those who work as we will value them,” Mr Osborne also claimed. “Together, the British people will share in the effort and share the rewards. This country borrowed its way into trouble. Now we’re going to earn our way out.”