APRIL 2014 UPDATE
Offshore and Onshore Intermediaries
The final position for the treatment of offshore and onshore intermediaries has now been confirmed with the publication of the Finance Bill. Yes the legislation is widely drafted and agencies in particular have had to rapidly react to the new requirements. A key point is that there was little time for many to change their processes and certainly insufficient time for any mass movement into Personal Service Companies, although this could change with time. That said, HMRC intend to monitor any mass migration into PSC’s and are likely to use their new powers (TARR) to stop this very quickly.
What has changed?
For starters HMRC has torn up the agency legislation and removed the need for personal service and for an “agency” contract. An intermediary, including an agency or employment business can continue to engage self-employed workers, without the agency rules applying, providing they can be sure that there is no supervision, direction or control by any party in the contractual chain or indeed no right of supervision, direction or control by any party in the contractual chain.
For both the onshore and the offshore rules, any shortfall in tax or NIC liabilities can be passed to the first intermediary (agency or other supplier) and onto their directors personally. The only defence is when fraudulent documentation has been supplied. Add to this the Governments intention to introduce a TARR (targeted anti-abuse rule) which will enable it to close down very quickly a scheme designed to avoid the new rules, this all represents a massive change to the status rules and recruitment processes.
What are we seeing?
* Most agencies have decided the risk is too great and are not engaging workers on a self-employed basis so we are seeing a move to the agency payroll for some and a move to umbrella companies for others
*Many are reviewing their entire supply chains to ensure that there is no offshore element and many are looking closely at umbrellas to ensure that they are meeting all the rules
*Many are taking a closer look at PSC’s, their shareholdings, directors and bank account details
*We have seen some issuing personal Deeds to be signed by the PSC director
*There are the usual new “models” doing the rounds- watch out for the “Elective Deduction Model”
Interaction with IR35
We have an HMRC guidance note on the interaction of the onshore rules with IR35. The intention is that this does not generally affect PSC’s as, in brief, the PSC will already have paid the appropriate tax and NIC on any salary paid and the payment of dividends does not fall into the definition of “employment income”.
What to expect
In summary the new rules require those affected to be completely clear about the status of the workers they are engaging and the status of any intermediary in the chain and most importantly to ensure that the correct tax and NIC is being accounted for by the right party. No doubt we will see too, changes to standard agency contracts to account for the new rules. It is difficult to see how any new employment model can get around these rules without creating a sham situation and with HMRC’s powers to go after directors personally we would hope that no one would consider such a scheme.
Other News...The House of Lords Select Committee Enquiry – the report is out!
The House of Lords (HOL) Select Committee on Personal Service Companies was appointed on 12 November 2013 to “consider the consequences of the use of personal service companies for tax collection”. The 60 page report was published on 7th April and we received an advance copy. The report contains no really unpleasant surprises but there are a lot of ‘ifs’ and ‘buts’. The HOL collected a lot of “evidence” during their enquiry but the key point is that the fundamental evidence -- HMRC’s deterrent figures in this instance – was held to be in doubt, so it is inevitable that the report can only be a series of ifs and buts.
So the Lords are saying that if the figures are accurate then, and only then, can HMRC establish if IR35 is proportionate and effective. And if HMRC’s figures are accurate then the Lords call for improvements to:
- tax returns’ service company questions and guidance notes,
- the imposition of penalties on taxpayers for incorrect answers on returns,
- HMRC guidance notes,
- HMRC’s Business Entity Tests,
- HMRC’s compliance resources, and
- Membership of the IR35 Forum and HMRC’s ability to listen to Forum members.
Many of these recommendations are already works in progress under the current review of the new HMRC IR35 processes, such as the revised IR35 guidance, which has been completed but is being held up with the move to the .gov.uk website.
But if HMRC’s figures are not correct then it is not clear from the report how the Lords see the future, especially how to protect the low-paid vulnerable workers they have highlighted as a major issue.
We must not overlook the buts. The key buts are -- don’t move the IR35 liability to the end-client and don’t suspend or abolish IR35 if HMRC are correct, but do look again at merging tax and NIC.
The Lords have also highlighted on the one hand the growth in PSCs and the value of the flexible workforce but on the other hand, that individuals are still taking a risk with IR35 owing to the lack of visible compliance activity by HMRC.
Expenses and dispensations
The HOL also highlighted abuse regarding expenses and dispensations.
Extending the assurances processes across the whole of the public sector
The Lords’ recommendation to extend the off-payroll assurance processes to all pay levels across the public sector should also be a warning to those currently ignoring IR35.
Look out for.... the Governments response to the HOL report – due within 2 months.
We have to await the government’s response to the report, but on the basis that past policy decisions have been made on HMRC’s analysis of the extent of the deterrent effect of IR35, then contractors should not hold their breath on the abolition or suspension of IR35 just yet.
IR35 ISSUES SUMMARY
• PSC’s are not the intended target of the new legislation
• Agencies are expected to issue new terms/contracts
• As we have always said “control” is the key IR35 status issue
• Look out for the Governments response to the Lords
And finally, despite calls from certain sectors for IR35 to be abolished or suspended once again, nothing has changed.