30 January 2017 by Russell Cockburn
Personal service companies will no longer be acceptable, says Russell Cockburn
Those working in industries which regularly use the services of freelance IT consultants, contracts managers and project engineers will be familiar with the prevalence of personal service companies and the potential impact that the ‘intermediaries’ tax legislation can have − commonly known as IR35.
Recent weeks have seen a significant increase in the level of activity in this field from HMRC, with hints in the press that a large number of highly-paid individuals working particularly in television are being pursued by HMRC for their use of personal service companies. It seems likely that in the future, the ability to use such structures is going to be heavily curtailed.
The Government has more recently made it clear that the use of such structures will no longer be regarded as acceptable in the public sector. A programme is under way to ensure that the PAYE rules are more strictly operated in these sectors and that individuals who have used such company vehicles to sell their services to the public sector in the past will not be permitted to work like this in the future. Instead, they will have to be transferred onto PAYE with the organisations for whom they work.
Although some might applaud this apparently more ethical approach to compliance in the public sector − some readers might even be experiencing a degree of schadenfreude − others will be finding this belated conversion to the higher moral ground by the Government and such large public organisations a little ironic.
Some readers will recall the Government encouraging the use of the personal service company structure during the 1980s and 1990s; indeed it became almost ubiquitous in certain areas of commercial activity. We now see HMRC challenging well paid media stars and individuals in other sectors for their use when it is fairly clear that for a long time these methods of operating were not just tacitly accepted by government and HMRC but in some instances were actively promoted.
Cases are apparently now beginning to emerge where HMRC is seeking back taxes plus interest and penalties for failure to operate the IR35 rules − where it can be shown that without their use of the company, the individuals involved would have been employees of their customer for tax purposes.
Some advisers and commentators are pointing out that the correctness of this approach has to be more than just questionable on HMRC’s part as they were, to some extent, originally involved in the discussions which lead to the use of the personal service company structures in the first place. To pursue taxes and penalties for earlier years, when the use of the structure has clearly been encouraged by those in authority over a prolonged period of time, seems more than just a little unfair.
It is not just in the arena of personal service companies that the tax status of individual workers has been brought into sharp focus. The Uber and Hermes cases have brought some new aspects to this area of tax compliance. The ‘employed or self-employed’ question has been a much vexed part of tax compliance and advisory work for many years in the UK.
For a long time now there has been a perception that this is a really fraught aspect of payroll and employment taxes are in need of significant simplification and clarification. Successive case law judgements have only added to the complexity of the problem and have done little to provide definitive guidance.
These cases, in particular the ruling in the Uber case – you can read more about it in Lydia Newman's article, 'Uber judgement' – seem to be taking us along an even more confusing road.
This judgement has in effect created a hybrid worker with entitlement to some employment rights but not one who is employed for the purposes of the operation of the PAYE regulations. Hence the outcome that it does not seem that Uber will have to operate PAYE on their drivers’ earnings, but will have the obligation to provide them with various employee benefits and payment entitlements in future. Such cases seem to be creating even more uncertainty in this field of employment taxes.