As I finish my coffee and toy with my next blog subject, a diary reminder pops up confirming that tomorrow is the closing date for responses on the consultation on a proposed new General Anti-Abuse rule (“GAAR”) which is targeted at artificial and abusive tax avoidance in the UK. I understand this will be debated in parliament this week. This of course follows another recent consultation by HMRC on “controlling persons” that closed on 16th August 2012 following the widely publicised and criticised use by the public sector (notably BIS and the BBC) of limited company contractors in senior posts earlier this year following the government’s review of off-payroll arrangements within central government departments. This of course has already led to recommendations to central government departments to ensure that their most senior staff are engaged on the payroll unless exceptional temporary circumstances exist and that as employers they should have the right (and exercise it) to seek assurance regarding the tax arrangements of their long term contracting staff.
We can sit and bet on whether or not these two proposals hit the Finance Bill in 2013, however the fact is that the government is strongly backing both given the furore earlier this year…the moral debate around tax couldn’t be more in focus this year, with allegations of wide usage of offshore tax avoidance arrangements by companies and individuals (poor old Jimmy Carr or not as the case may be!) hitting the headlines in June and the continuing dire economic state we find ourselves in.
So what will this all mean to users of contracting staff (whether directly or through staffing agencies) and staffing agencies who supply contractors to end users?
Controlling Persons Legislation
Organisations that engage contractors (clients) who are “controlling persons” supplied through intermediaries (e.g. their personal service company, or another limited company but doesn’t include staffing agencies) will be required to deduct tax and national insurance contributions (NICs) under PAYE from payments due to the “controlling person”. A “controlling person” is:
“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. This would be 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.”
There is a notable exception for small businesses classified as those who employ fewer than 10 persons and whose turnover and or balance sheet does not exceed £1.7million (roughly based on euro exchange rate).
However, those of us who have been around the block will of course spot the obvious greyness in what is significant proportion.
So what about IR35? This new legislation would in effect take priority over IR35 and Chapter 7 (agency worker) rules. Surely, the whole purpose of IR35 was to tackle the issue of disguised employment! So, it would appear that rather than sort out the resource issues in HMRC and get on with enforcing IR35, the decision is simply to introduce another piece of legislation which will add another level of complexity. So much for removing red tape for business!
Apart from the obvious practical issue of clients having to deal with the admin around the deductions of tax and NICs, in complete contrast to IR35 the responsibility is fairly and squarely on the shoulders of the engaging organisation.
Oh, and to add, the proposed legislation at the end of the consultation of course bears no relation to the plain English explanation of the government’s proposal in its consultation, there is clearly a way to go get any draft in a fit state.
General Anti-Abuse Rules (GAAR)
The proposed new rules do not replace any existing tax legislation, the idea being that these rules will provide an additional means to HMRC to catch tax schemes it believes are artificial and abusive. The rules are targeted to apply to; income tax, corporation tax, capital gains tax, inheritance tax (it is noted that there may some complexities in applying the rules to this tax), stamp duty land tax and petroleum revenue tax. Of course, the proposed legislation at the back of the consultation is left broad and does not limit the scope of GAAR so we have to take HMRC on trust that this won’t be used against other taxes in later years; hopefully the proposal of an independent advisory panel who will advise on whether arrangements fall under GAAR (and the tribunal must take account of such opinion) will allay some fears but how this will all work in practice is another matter.
In response to concerns, the key provisions set out in Chapter 3 of the proposed legislation will apply GAAR where both a “tax arrangements” test and an “abusiveness” test are met:-
Arrangements will be “tax arrangements” where a tax advantage is a main purpose or one of the main purposes of the arrangements.
Tax arrangements will be considered abusive if the entering into/carrying out of those arrangements cannot reasonably be regarded as a reasonable course of action. This is fondly referred to as the “double reasonableness test”.
Impact on clients and staffing agencies
Up until now clients (whether they have realised or not) have been only really at risk of assessment for PAYE and NICs with respect to contractors where the contractor has been paid offshore, under the Income Tax (Earnings and Pensions) Act, and staffing agencies alike only really at risk where they have accepted contractual indemnities in respect of any taxes assessed and paid by the client.
However, the proposed “controlling persons” legislation ultimately will bring the risk of assessment and liability directly to clients. The question is how obvious will a controlling person be within the client’s organisation and how much will clients push back on staffing agencies that contractors are not controlling persons; with the buck stopping at staffing agencies when clients require tax indemnities in contractual arrangements.
Unfortunately, there is no getting away from the fact that staffing agencies need to understand their contractor base fully and will need to get to grips with ensuring they have administrative processes in place to assess who is and who is not a “controlling person” before they place a person.
Staffing agencies should already have processes in place to manage their contractor base and understand their engagement arrangements given MSC legislation.
- Agencies should audit and regularly review their usage of limited company contractors and ensure that they are clear as to who are PSCs, who are supplied via umbrella companies, and those who are supplied through other intermediaries and that their contractors are not paid offshore!
- Agencies should also make sure they understand the basis of the arrangements that the umbrella companies and intermediaries are engaging and supplying contractors under to ensure they are not at risk of the managed service company legislation (MSC) which can transfer PAYE and NIC debt to the agency and or the hirer in the event HMRC find that the arrangements fall within MSC.
- Agencies should consider putting in place PSL arrangements in order to control the breadth of usage of intermediaries and umbrella companies and to manage compliance to avoid having to continually review different arrangements on offer and falling foul of potential tax liability.
- Agencies should as a matter of best practice ensure that umbrella companies are using appropriate expense schemes which have been approved by HMRC
- Clients should ask their agencies what processes and monitoring they have in place to ensure that the client is not at risk of MSC and or offshore liability for tax in receiving contractors.
- Clients should review their usage of contractors at a senior level in their organisation to get an advance heads up as to the affect that any controlling persons legislation may have on their usage of interim staff.