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‘Controlling persons’ must be on the payroll, says Treasury

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The government is consulting on a proposal to ensure that ‘controlling persons’ working for an organisation have PAYE income tax and NICs deducted at source.

The consultation follows a review of government departments, published yesterday, which found that ‘over 2,400 key public sector appointees have been engaged off payroll, in some cases for more than ten years’, HM Treasury said.

Forty per cent of appointees had been engaged ‘off payroll’ for more than two years. The Treasury reported that:

  • ‘departments pay intermediaries, such as employment agencies, in around 85% of cases, personal service companies in around 10% and the self-employed in less than 5%;
  • over 40% of those identified are IT contractors; 
  • the majority of those identified are paid on a daily basis, with around 70% costing the appointing department more than £400 per day; and
  • around 3% of those identified have been engaged off payroll for more than ten years’.

The review recognised that ‘there are circumstances where it may be appropriate for an employer to appoint an individual off payroll and that the fact that an individual is engaged in this way does not mean that they are not paying the correct amount of tax’.

But it was ‘essential’ that government employers were able to assure themselves that their long-term senior staff were meeting their tax obligations. ‘We have to bring an end to the “don’t ask, don’t tell” approach to this issue,’ said Danny Alexander, Chief Secretary to the Treasury.

In a foreword to HMRC’s Consultation into the Taxation of Controlling Persons, Exchequer Secretary David Gauke noted that Alexander’s review concluded ‘that there is a lack of transparency around the tax arrangements of public sector appointees, where the worker is not on the payroll of the engaging organisation’.

HMRC said: ‘There are many cases where the use of an intermediary, often a personal service company, is for legitimate commercial reasons. Indeed, many businesses start as small limited companies. The government is very supportive of intermediaries, including personal service companies as a cornerstone of developing business, and it does not believe that personal service companies are necessarily avoidance devices.’

But it had become ‘increasingly clear’ that there was ‘an established and growing problem with people using intermediaries to disguise employment’.

The ‘high profile’ IR35 legislation, introduced ten years ago, requires an intermediary to pay income tax and NIC on all income from a contract that ‘would be a contract of employment if it wasn’t for the interposition of the intermediary’.

HMRC added: ‘The government’s intention is to ensure that where an organisation engages a controlling person the engaging organisation will be required to deduct the income tax and NICs at source, as they would for their employees.’

Margaret Hodge, Chairman of the Commons Public Accounts Committee (PAC), said she and her colleagues were ‘shocked’ that HMRC ‘appears to have advised senior public sector employees that it was appropriate for them to avoid tax by using a managed service company’.

As the PAC published today’s report on HMRC’s Compliance and Enforcement Programme, Hodge said: ‘It is incredible that the department could under any circumstances advise that this was acceptable behaviour for a public servant.’

The Committee reported: ‘We were alarmed at reports that the department had advised that the use of managed service companies to avoid tax could ever be appropriate for full-time employees of public bodies.’

HMRC said it would ‘bring in an additional £7bn by 2014’ through tackling abuse of the managed service companies or personal service companies (PSC) rules.

‘PSCs can be legitimate commercial arrangements, which means we have to consider the details of the arrangement in each individual case,’ HMRC said. ‘Where PSCs are used purely as tax avoidance vehicles it is always unacceptable, and when we have evidence it’s happening we stop it.’