Government unveils new clause to strengthen IR35
The government today unveiled the first change to IR35 since it took effect over a decade ago in the shape of a single clause designed to strengthen the legislation - by extending it to limited company freelancers who are ‘office holders’ of their clients.
Without the clause, the Treasury said that a worker using a personal service company who would be considered as an office holder of the end-user if it weren’t for the intermediary (-the PSC), would fall outside IR35.
As a result, the Treasury wants to replace a part of subsection 49 of the Intermediaries Legislation with the clause, so that IR35 will in future apply to office holders engaged through a third party intermediary, such as a personal service company.
In an explanatory note on the extending of IR35’s coverage, the Treasury said the extension would apply both where the worker is named as an office holder of the client but paid through an intermediary, and where the intermediary, such as a PSC, is named as the office holder of the client.
Martyn Valentine, founder of IR35 advisory The Law Place reflected: “This is a significant step and on the face of it would bring...all office holders [of client outfits] who use personal service companies within the scope of the IR35 legislation, whether the personal service company is used as a vehicle for payment or is named as the office holder itself.”
In its guidance note, The Treasury summed up the effect: “Providing there is also a requirement for the personal service of the worker, this clause brings into charge for income tax, as the worker’s deemed earnings from employment, any payment made to the worker via an intermediary (third party).”
This means that income from the work that the worker’s personal service company (or intermediary) receives will be treated as employment earnings, meaning the worker is liable to pay income tax on it at employment rates, not the small companies’ rate.
The Treasury added: “This change equalises the tax treatment of office holders engaged through third parties with the treatment under the relevant National Insurance legislation, under which they are already in the same position as individuals who would be in an employment relationship.”
Kate Cottrell, of IR35 advisory Bauer & Cottrell agrees: "The changes to the IR35 legislation for office holders generally puts the tax and NIC positions on an equal footing. This is because under the old IR35 legislation a director could be outside IR35 for tax, but caught for NIC because of the NIC deeming provisions."
Such an effect was anticipated by recruitment law firm Lawspeed, following the government’s admission that a “slight anomaly” in IR35 meant there was doubt whether the legislation covers office-holding contractors for tax purposes.
Yet Mr Valentine, formerly of the firm, believes that the government should have dealt with office holders via Section 44 of the Income Tax (Earnings and Pensions) Act 2003, rather than tweaking the IR35 legislation, assuming keeping the coffers full is the objective.
He explained: “The government would be better served by amending Section 44 of ITEPA to include office holders using personal service companies as this step would allow complete recovery of employment tax, without the need for HMRC to issue a 5% allowance if the (amended) IR35 legislation is used.”
Following its initial review of the new clause for IR35, another legal advisor to contractors, Egos, says the Treasury’s proposed extension of the 1999 legislation “may not be an enormous big deal” for most personal service company contractors.
Nevertheless, the advisor cautions interim mangers, so–called ‘shadow directors’ and some individuals involved in joint ventures to consider their arrangements carefully.
All parties affected by the proposed amendment to IR35 have been invited by the government to email an HMRC representative, with a view to providing “comments to ensure the legislation works as intended,” for the tax year 2013-14 and subsequent tax years.
To help inform such comments, the full clause is reproduced, below, from the Treasury document:
Arrangements made by intermediaries
- In Chapter 8 of Part 2 of ITEPA 2003 (application of provisions to workers under arrangements made by intermediaries), in section 49 (engagements to which Chapter applies), in subsection (1), for paragraph (c) substitute –
“(c) the circumstances are such that -
(i) if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client or the holder of an office under the client, or
(ii) the worker is an office-holder who holds that office under the client and the services relate to the office.”