The Government is consulting on a proposed legislation to require larger organisations to place all ‘controlling persons’ on the payroll and not to allow payments through personal service companies (psc) without deducting tax at source. The effect of this legislation would be that the whole amount paid by the engaging businesses to the PSCs would be treated as remuneration of the controlling person as an employee. As a result the engaging organization will need to deduct PAYE and NIC liabilities from payments made to the PSC and, in effect, tax the worker the same way as employees of the organisation. ITEPA 2003 is proposed to be amended and the new provision, if becomes law, will take precedence over IR35 (Part 2 Chapter 8 ITEPA 2003), Part 2 Chapter 7 ITEPA 2003 and all extra statutory provisions.
The consultation running till 16 August 2012, defines a ‘controlling person’ as someone who is able to shape the direction of the organisation having authority or responsibility for directing or controlling the major activities of the engaging organisation during the year; someone who has managerial control over a significant proportion of the organisation’s employees and/or control over a significant proportion of the budget of the organisation. ‘Micro businesses’ (employing fewer than 10 persons and whose turnover and/or balance sheet doesn’t exceed Euro 2 million) engaging controlling persons through a PSC are excluded from this provision.
An interesting feature of this proposal is that rules will apply to any organization whether public or private: a clear response to the recent revelations that senior civil servants were using PSC structure to avoid tax.
IR35, introduced more than 10 years ago, was indeed a complex piece of legislation because the compliance burden was on the worker and hundreds of thousands were affected. But this one, a reverse version of IR35, places the burden on the employer who is already bound by the current PAYE provisions of ITEPA 2003 that extend to all the ‘office holders’. So, the new legislation is unlikely to change anything in practice!
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