Osborne uses Budget 2012 to plot an addition to IR35

Jenrick IT are keeping a close monitor on any potential changes to the IR35 legislation and will be ir35-legislation-for-contractorsreporting in the weeks ahead. George Osbourne appears to have his sights set on Limited Company contractors as a revenue earner for the exchequer.

George Osborne used his Budget 2012, delivered earlier today, to address the avoidance of tax through the use of personal service companies (PSCs), in line with industry predictions issued exclusively to CUK.

The chancellor’s full report states that the government will introduce a package of measures with two broad aims – to tackle avoidance via PSCs and to make IR35 easier for “genuinely in business” PSC users to understand.

Rather than representing a new stance on the issue, the announcement by Mr Osborne is merely a reiteration of government policy, under which the IR35 Forum is preparing new measures to achieve the two stated goals by April 6th.

According to the chancellor’s report, the incoming package to tackle tax avoidance through PSCs includes ways to simplify how “IR35 is administered” – the very mission statement of the IR35 Forum.

The package will also serve to strengthen the taxman’s employment income “specialist compliance teams,” which Forum members were told at the last meeting for which minutes are available.

But the Big Red Book’s addressing of ‘IR35′, mentioned only twice in the 114-page report, concludes with a new development which represents the potential devil in the detail for IT contractors and other PSC users, experts on the legislation say.

Although subject to consultation, the Treasury says “office holders/controlling persons who are integral to the running of an organisation” will be required “to have PAYE and NICs deducted at source, by the organisation by which they are engaged.”

Speaking exclusively to CUK, Kate Cottrell, of employment status firm Bauer & Cottrell said of the news: “This is the first time we have seen the term ‘controlling persons’ and the definition of a controlling person will form part of the consultation.

“It will invariably be someone who is integral to the running of the organisation and has a degree of control over the organisation. We will have to wait and see the consultation questions to understand more”.

However, her initial interpretation of the government’s wording is that “senior individuals” at an outfit working via PSCs will be the target of what will likely “be a new measure probably by way of a deeming provision”  that will be, she warned, “in addition to IR35.”

So, while an umbrella company captain is technically right to point to the Budget and say with IR35 it’s ‘better the devil you know’, because a “replacement” was not announced today, the government is however raising the prospect of an extra regulation.

At accountancy firm Contractor Essentials, managing partner Elaine Hazlewood reflected:

“The government appears to be reacting to recent [press] reports…by announcing that it is going to consult on introducing a requirement in the 2013 Finance Bill, that any ‘office holder’ or ‘controlling person’ who is integral to the running of the organisation must have PAYE & NIC deducted at source from any payments made to them by that organisation.

“While this will not affect the great majority of contractors, it may affect anyone who is engaged at a very senior level with their client. At this stage, there is no definition of who is an ‘office holder’ or ‘controlling person,” but anyone operating at board level should expect to be affected.”

Bauer & Cottrell agreed:

“[The likely] addition to the current IR35 legislation is not intended to apply to genuine small businesses, but to capture those who should be paying employment taxes on their income… I would recommend that those in controlling positions, including interim positions, should take heed of this announcement.”

PCG, the contractors’ trade group, wants “urgent clarification” from the government for its members. It described the plans to explore requiring PSC users engaged as “office holders/controlling persons” who are “integral to the running of an organisation” to become PAYE as “significant.”

“These plans appear ambiguous and may affect senior interims,” the group warned. “It is crucial that these legitimate businesses do not suffer as a consequence.”

Further Information

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