Controlling persons? Government reacts to tax avoidance within the public sector

As the IR35 storm brews, watch out for interesting recent developments in the field of limited company contractors.

Following the expose of Ed Lester (the boss of the Student Loans Company found to be being paid through an intermediary limited company), it has been found that others are working this way – and whilst formally engaged within the public sector.

In an announcement made on 23rd May 2012 by HM treasury, it was stated by the Chief Secretary of Treasury, Danny Alexander that over 2,400 people are paid ‘off payroll’ in the public sector. Suprisingly, the number includes people who have been engaged for over 10 years. It also begs questions about whether some of those engaged for such lengthy periods could be ‘disguised employees’ that are not paying sufficient tax.

The announcement was accompanied by a new consultation on targeting “controlling persons”. ‘Off payroll’ is the new terminology being touted in the contracting sphere, which includes personal service companies, self-employed workers and those working through intermediaries. The Government appears to be increasingly uncomfortable with individuals working in this way generally, but even more so when they are engaged by a Government department or related body.

Tax avoidance within Government?

It seems the Government is waking up to the fact that it needs to get its own house in order if it is to tackle the incorrect use of limited companies as a means of receiving payment generally. Talking about the now infamous ‘off payroll’ engagements, Danny Alexander concedes that “the opaque nature of those engagements has created the conditions where tax avoidance could be taking place”.

The way ahead

As a means of tackling the problem, the Treasury has set out in its consultation plans for all organisations other than micro businesses that engage a ‘controlling person’ to be obliged to deduct PAYE tax and National Insurance at source. A controlling person is likely to be someone directing or controlling the major activities of the hiring organisation, and so this is only likely to affect senior contractors, for example those of the calibre of Ed Lester.

Therefore the responsibility for accounting for the correct tax for those considered controlling persons will switch from the traditional position under the IR35 legislation – where the individual working through the company is responsible for paying the correct tax – to a new emphasis on the engager of the controlling person being responsible for ensuring the correct tax and NI is paid.

It seems that this could affect the payment flows of interim providers if the interim meets the requirements of a controlling person. HMRC will enforce this practice through employer compliance visits, where it will check whether those that are considered controlling persons are on the payroll.

The proposal is unlikely be as far reaching as IR35 even though the government is asking whether it should considering extending scope. The proposed new controlling persons test is set to gather momentum as it heads towards the private sector, riding as it does on the back of the tax avoidance rhetoric which is very popular with the British voting public.

By Ricky Coleman at Lawspeed