UK and International Tax news

Taxation Of Controlling Persons Condoc

Thursday 7th June 2012

As announced in the March 2012 Budget, HMRC has now issued a consultative document on the proposal that a provision is introduced to ensure that controlling persons have PAYE and NICs deducted at source by the engaging organisation.

This follows on from a review launched by the Chief Secretary to the Treasury into the tax arrangements of public sector appointees on 31 January 2012 with a view to ascertaining the extent of arrangements which could allow public sector appointees to minimise their tax payments.

The review concluded that there was a lack of transparency around the tax arrangements of public sector appointees, where the worker was not on the payroll of the engaging organisation. The review’s recommendations are that the most senior public sector staff should be on the payroll and that departments should have the right to seek assurance in relation to the tax arrangements of long term contractors. It is especially important in the public sector that it is transparent that tax obligations are being met.

The Government also believes that where people are in a position to control the major activities of an organization, that organisation, whether in the private or the public sector, should be able to have an assurance that the worker who is in a controlling position in the company is meeting their tax obligations.

Where a person uses a personal service company to disguise their true employment relationship with their engager, there is currently anti-avoidance legislation to ensure that they do not gain a tax or NIC advantage. The intermediaries’ legislation is contained in ITEPA 2003, previously within IR35. This legislation requires the intermediary pays income tax and NIC on all income from a contract which would be a contract of employment if it was not for the interposition of the intermediary.

When IR35 was introduced ten years ago, it was unusual for a senior or controlling person to be engaged through their own limited company. The Government has now said that where an individual has the requisite level of control to direct the activities of the organisation and is engaged at a senior level through an intermediary company, that individual should be taxed as an employee.

The Government proposes to introduce new legislation which would require the engaging organisation to place all controlling persons on the payroll. This provision would apply even where they might be working through a personal service company for other purposes and even if the payments made by the engaging organisation were made to the personal service company and not directly to the individual worker.  

The condoc requests responses on a number of questions by 16 August 2012, in particular:

  •   is creating a provision which would require the engaging organisation to deduct tax and NIC at source a correct and proportionate solution to this problem,
  •   does the proposed provision raise any commercial, employment or other issues that would need to be considered before any final conclusions are reached, and
  •   are there alternative approaches that would better deliver the transparency the Government is seeking in the taxation of controlling persons than requiring them to have tax and NIC deducted at source by the engaging organisation.
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