Contractors were anticipating that the Budget 2012 would include measures to simplify the way IR35 is administered. But what came as a surprise in the full Budget document was the statement that the “Government will introduce a package of measures to tackle avoidance through the use of personal service companies”.
These anti-avoidance measures, it seems, will start by requiring “office holders/controlling persons who are integral to the running of an organisation to have PAYE and National Insurance Contributions (NICs) deducted at source”.
However, according to contracting sector tax and IR35 experts, this reaction to the largely inaccurate media coverage and the Government’s political spin of the use of interims in the public sector, such as Student Loans Company head Ed Lester, is likely to be contained to a small, albeit important, part of the contracting industry.
“The announcements regarding increasing tax avoidance teams and continued progress with tax simplification were expected,” says contractor accountant Brookson’s managing director Martin Hesketh, “but what was surprising, however, is the additional element around office holders and controlling persons which is clearly a political knee-jerk reaction and flies in the face of the principles brought in with IR35.”
PSC anti-avoidance measures unlikely to apply to most contractors
Andy Vessey, of contractor tax and IR35 specialist Qdos Consulting, agrees that the measures are a direct result of the Ed Lester affair, but says their impact is likely to be limited. He explains: “Based on the specific wording in the Budget document, any new anti-avoidance measures targeting the users of personal services companies are likely to be restricted to those contractors who are office holders and controlling persons.”
“Even through an IT or engineering contractor may be fulfilling an integral role in their current project, they would appear not to be the target of these measures, because they are unlikely to be office holders or controlling persons,” continues Vessey.
However, contractors working on project and programme management assignments may be at risk of falling within the scope of any new measures, depending on how widely the definition of ‘controlling persons’ is spread.
No statutory definition of an ‘office holder’
The Budget documentation says that any measures would be subject to a consultation that, according to Vessey, must happen soon and include proposed statutory definitions for debate.
There is no statutory definition of an 'office holder', nor of a 'controlling person', so these definitions will be required as part of any consultation and subsequent legislation
Andy Vessey, Qdos Consulting
“There is no statutory definition of an ‘office holder’, nor of a ‘controlling person’, so these definitions will be required as part of any consultation and subsequent legislation, although we do have an existing definition of integration for employment status purposes which may be applied and possibly expanded upon.”
Vessey’s view is that, for the measures to be included in the Finance Act 2013, any consultation would have to start in the next few weeks or in early summer to allow sufficient time for the definitions to be thoroughly tested. He also points out that the contractor client community will need to participate, as it may ultimately become responsible for policing new legislation, and collecting tax at source.
What’s happened to the IR35 Forum?
The Budget’s total lack of any detail about what making the IR35 legislation easier to understand entails is very disappointing, as PCG’s Managing Director John Brazier explains: “PCG would have liked to have seen the Government publically expand on the plans for “making IR35 easier to understand”, as the detail is crucial for freelance businesses.
We have worked hard on the IR35 Forum in the last year and had been hoping there would be more of an update in the Budget than this rather generic statement
John Brazier, PCG
“We have worked hard on the IR35 Forum in the last year and had been hoping there would be more of an update in the Budget than this rather generic statement.”
Vessey agrees, but feels the use of the specific wording in the Budget document provides clues as to what may be expected. “The Budget says the government will ‘make the IR35 legislation easier to understand for those who are genuinely in business’. Drawing genuine businesses into the discussion suggests we might see new and formalised ‘in-business’ tests.”
With IR35 it is better the devil you know, and any replacement would cause more upheaval and cost and is in no way guaranteed to remove any tax burden
Derek Kelly, Parasol
Parasol’s Derek Kelly is of the view that simplification of the existing legislation is the way forward: “The Budget report does highlight that IR35 is to be simplified and a new regime to police it introduced. This is good news. I have always been of the view that with IR35 it is better the devil you know, and any replacement would cause more upheaval and cost and is in no way guaranteed to remove any tax burden.”
Vessey expects the results of the IR35 Forum will be published in the coming weeks, providing contractors, and their advisers, with details of how IR35 in its current form will be administered in future. “Although the minutes from the most recent IR35 Forum meeting in March have not been published, we have been led to believe that new guidance will be published alongside this year’s Budget, within a matter of weeks.”