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A consultation on new tax rules for personal service companies and other intermediaries has been launched by the Treasury.
The aim is to introduce better regulations governing ‘off-payroll’ appointments in central government, after a review of departments and their arm’s length bodies revealed that more than 2,400 key public sector appointees have been engaged in such a manner.
Of the appointees, 40% have been engaged off-payroll for more than two years, and 1% for more than ten years. The review also found that 40% were IT contractors, with most paid on a daily basis, and around 70% costing the appointing department more than £400 a day.
While recognising it may sometimes be appropriate for an employer to appoint an individual off payroll and that the fact an individual is engaged in such a way does not mean they are not paying the correct amount of tax, the government is proposing to tighten the rules associated with employing people off payroll:
- The most senior staff must be on the payroll, unless there are exceptional temporary circumstances.
- Departments will be able to seek formal assurance from contractors with off-payroll arrangements lasting more than six months and costing over £220 per day that income tax and National Insurance (NI) obligations are met. Departments should consider terminating the contract if that assurance is not provided.
- This will be monitored carefully with financial sanctions for departments that do not comply.
The recommendations will be implemented within three months.
The taxation of controlling persons consultation document includes a provision that such individuals have income tax and NI deducted at source by the engaging organisation. It closes on 16 August. Responses should be sent by email.
Grant Thornton’s head of tax, Francesca Lagerberg, said the condoc was a ‘crackdown’ as a result of ‘the government’s embarrassment about finding so many people using personal service companies within its own departments.
‘The fact it seems necessary to bring in yet more legislation to go with the existing employment/self-employment rules and IR35 suggests the decade of IR35 has failed to work as intended,’ added Ms Lagerberg.
Rather than fixing the problem of public departments engaging senior controlling persons via personal service companies by changing the rules for all employers, KPMG partner Jayne Vaughan claimed a simpler and easier approach would be to ‘introduce a policy under which government departments were not allowed to use these personal service companies if that is the objective being sought’.
She said, ‘There are concerns about wider tax leakage from the general use of personal service companies, but these are already being addressed via changes already under way to the IR35 regime. All in all, the consultation document seems surplus to requirements.’
