New rules to tax state PSC users as employees
Senior IT contractors who supply the public sector using their own personal service company (PSC) were yesterday confirmed as the prime targets of a crackdown by Revenue & Customs, designed to ensure their tax arrangements are “no longer open to question.”
Opening a consultation (PDF) first promised more than a year ago, the Treasury said new measures in Finance Bill 2013 would ensure ‘off-payroll’ workers in ‘controlling’ positions receive the same tax treatment as employees, with income tax and NIC deducted at source, even if they are PSC.
Officials suggested the measures were necessary because while a PSC is often a genuine commercial arrangement, “it is not clear” to the government whether its total pool of off-payroll staff - 40% of whom are IT contractors - pay the right amount of tax and NIC.
It acknowledged the IR35 legislation came into force as a result in 2000, and confirmed that HMRC has recently “strengthened its specialist teams who investigate cases where there is potential non-compliance with employment taxes.”
The Treasury said: “These teams also investigate cases where there potentially IR35 legislation should have applied. The data from this review has been provided to HMRC to enrich their risk assessment process. HMRC will open investigations into the highest risks whichever sector the person is working in.”
Although there is no criticism of IR35, the consultation paper says the government’s current “contracting policy” means departments do not have the contractual right to request detailed tax assurance from individuals as to their tax position.
Moreover, HMRC cannot provide this information due to taxpayer confidentiality, making it difficult for the end-user (such as a central government department) to “understand if there is a possibility that individuals are in a position where they may be able to minimise their tax and NICs payments.”
The officials argue: “The government, as the engager of these individuals, has the right to seek assurance that those it engages but does not place in its payroll, are paying the correct amount of tax and NICs."
So unless there are “exceptional temporary circumstances”, the most senior workers – “controlling persons” at the end-client/department – will in future be on the payroll, regardless of whether there is a PSC, recruitment agency or other intermediary already in place.
The Treasury explained: “This will ensure that where someone is able to control and direct the activities of the organisation – for example members of the senior management team – they will be taxed in the same way as other employees of the organisation, with income tax and NICs deducted at source.”
Also under an incoming deeming provision, which will apply to both the public and private sectors, the engager will be subject to monitoring after one year and faces the prospect of sanctions for non-compliance. But the end-user also has the right to seek assurance about the tax arrangements of - and from - its “long-term specialist contractors.”
In fact, end-users will be able to seek "formal assurance" from contractors with off-payroll arrangements lasting more than six months and costing over £220 a day that their income tax and national insurance obligations are being met. "Departments should consider terminating the contract if that assurance is not provided," the Treasury proposes.
All together, the crackdown will hit at least 2,400 off-payroll workers, who have been identified (as of Jan 31, 2012) as working at central governments departments or arm’s length bodies, mostly on contracts lasting longer than six months. Their names will not be released in line with data protection laws; however all earn in excess of £58,200 a year.
Yet contrary to mainstream press coverage, only five per cent of the state’s non-payroll workforce are ‘senior management,’ though in line with the reports, most receive their pay packets on a daily basis.
“The vast majority of cases relate to technical specialists – and over 40 per cent relate specifically to IT specialists,” the Treasury found, pointing to the 2,400 workers, of whom nearly half have been 'off-payroll' for more than two years.
“Around 10 per cent of cases relate to payments made directly to a personal service company – less than five per cent relate to payments made directly to individuals, and over 85 per cent to intermediaries such as employment agencies.”
These arrangements – being engaged through a personal service company, or through an agency – and then a service company or other company, were described as “the focus” of the deeming provision, which one advisor expects to take effect from April 2013.
As if to justify its broad approach, the Treasury pointed out that while an off-payroll worker may be paying the correct tax, the sheer “number of off-payroll engagements across the public sector, and the length and size of these contracts, suggests that there could be scope for artificial tax minimisation.”
Its chief secretary Danny Alexander enforced: “This government is committed to tackling all forms of tax avoidance and has taken a wide range of measures to close down tax loopholes.
“Where the employer is the government, it is essential that public sector employers are able to assure themselves that their staff are meeting their tax obligations.”
Mr Alexander’s comments follow predictions that the government would take action to ‘put its own house in order’, following a series of media revelations about senior government workers avoiding tax by receiving their pay as a company rather than an individual.
“We urge caution against starting a witch-hunt which will actively damage the UK's public sector and will cost the taxpayer even more,” said PCG, the trade group for freelance contractors, reflecting on the proposals yesterday.
Managing director John Brazier spoke of a “serious risk” of penalising genuine, hard-working freelancers, and the public sector as a whole, if the deeming provision goes ahead in its current form.
“There is a danger that this step by the Treasury will lead to a clamour to introduce new policy that fundamentally fails to differentiate between those who abuse the tax legislation and the vast majority who operate legitimately,” he said.
“We must remember many public sector organisations are currently using freelancers because it is the best way of getting that particular job done, both in terms of skills and cost to the taxpayer.”
Nevertheless, the Treasury believes its envisioned framework will help the government “ensure that the tax arrangements in relation to the most senior public sector appointments will be less open to question in the future.”
“The provision will not come into effect for a year and will not cover other highly paid specialists identified by the review,” the department added. “The government will therefore take further steps to ensure that departments have the right to seek assurance that off-payroll engagees are meeting their income tax and NICs obligations.
“In designing these measures, the challenge is to find the right balance between having assurance that where individuals are contracted by central government they are meeting their tax obligations, while avoiding the imposition of significant administrative burdens on small businesses or departments.”
In response, Stuart Davis, chairman of the Freelancer and Contractor Services Association, sounded unsure the challenge could be met and opposed the proposed rule's anticipated application to the private sector. “For a government that is attempting to cut red tape and promote a strong and flexible economy, attempting to constrict companies and organsations in this way smacks of an extraordinary over-reaction to a barely recognisable problem.”
He added: “As the Chief Secretary said in his statement, IR35 exists to ensure that tax avoidance is not taking place, and it is a gross insult to freelancers and contractors to suggest that just because they are not full time employees they are somehow abrogating their leadership responsibilities."