HMRC issued a consultation document on 17 July 2015 to explore options for tightening up IR35, the intermediaries legislation that aims to tackle tax avoidance through disguised employment.
IR35 requires individuals working through an intermediary (e.g. a personal service company (PSC)) to pay broadly the same tax and NICs as any other employee, where they would have been an employee if they were providing their services directly to the end-user. Where IR35 applies, it requires the PSC to account for PAYE/NI. Where it does not apply, using a PSC can offer significant tax advantages to workers compared to direct employment by the client (e.g. by paying them “dividends” as opposed to salary). The expenses position may also be more favourable.
HMRC are concerned that many PSCs are not complying with IR35. The two main options considered by HMRC in the consultation document are:
- putting the burden of determining whether IR35 applies on the engager (end-user) rather than the PSC (i.e. the engager would be liable for PAYE/NI if IR35 applies); and
- basing the test for IR35 solely on whether a third person (most usually the engager) exercises supervision, direction or control over the manner in which the worker provides his services (i.e. making it harder to fall outside IR35).
It is a safe bet that HMRC’s preference is to adopt both these options. If implemented, this would take away the main tax advantages of a PSC in one fell swoop. It is generally going to be difficult for an engager to be certain enough that a worker is not under its supervision, direction and control given how widely this test could be construed. Unless the worker is very obviously a specialised contractor who is clearly not under supervision, direction or control as to the manner in which he operates, therefore, engagers would be likely to insist on deducting PAYE/NI from payments to the PSC in order to avoid any risk of non-compliance.
It is worth noting that if these options are adopted then this risk for an engager would be higher when contracting with a PSC than with a self-employed worker direct. In the latter case the obligation to deduct PAYE/NI would only apply if the worker is deemed an employee based on the fuller test that currently applies under IR35 (i.e. considering all of the various factors that could indicate employment rather than solely supervision, direction and control).
This is of course speculation until we see the result of the consultation towards the end of the year. However, the recent consultation regarding proposed changes to the rules on travel and subsistence expenses in the context of intermediaries shows the general heading HMRC is taking here. At the moment a worker who is employed by an intermediary (e.g. a PSC, umbrella company or employment business) and works on temporary assignments for different engagers can potentially claim his travel and subsistence expenses tax free on the basis that he is working at a number of different temporary workplaces under a single overarching employment with the intermediary. Under the proposed changes, this will generally no longer be possible for workers supplying personal services who are subject to employee-type supervision, direction or control. Contrary to previous suggestions, this is now expected to impact PSC workers.
From next April, tax advantages in using a PSC could be very hard to find.