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UK Tightens Rules Against 'Disguised Employment'

by Robert Lee,, London

21 December 2012

A new amendment to UK income tax legislation strengthens existing Intermediaries Legislation (known as IR35) to prevent "disguised employment" tax avoidance.

The amendment closes a loophole which has allowed senior executives to reduce their income tax liability by establishing Personal Service Companies (PSCs). According to an explanation published by the Treasury, the amendment will apply "in each case where the worker would be considered as an office holder of the client if the services were provided directly under a contract between the worker and the client." Where there is a "requirement for the personal service of the worker," any payment made to [the] worker via an intermediary would be "deemed earnings from employment."

Derek Kelly, managing director at limited company contractor accountants ClearSky Accounting, said that the draft legislation "serves to strengthen IR35, and reinforces the principle that someone who is part and parcel of a business will be deemed to be 'inside' the legislation."

However, addressing fears that freelance workers would also be affected, Kelly added that "the fundamental fact still holds true: if you are a genuine contractor working for a range of clients through your limited company, and are not attempting to disguise employment, you have absolutely nothing to worry about."

The amendment follows a statement in the Treasury's Autumn Statement that: "The government has decided not to proceed with the proposal to tax those who meet the definition of a controlling person at source. This is because HMRC's new approach to policing IR35, along with the measures introduced in the public sector this year, are sufficient to prevent the loss through disguised employment in this way." The original proposal would have imposed automatic Pay As You Go and National Insurance Contribution obligations on interim executives and specialist consultants using PSCs, and the decision against adopting this approach was welcomed by George Lovell, tax partner at DTE Business Advisers.

According to Mr Lovell, "The Government's initial proposals would have been an excessive and unnecessary burden on businesses. While the existing IR35 rules are not perfect, with proper compliance they should be sufficient to deal with the improper use of PSCs in cases where the worker should rightly be classed as an employee. Thankfully, common sense has prevailed and the resources will be better spent on more focused enforcement of the IR35 rules."

The government introduced new guidelines in May which use a points system to determine whether a contractor is either "High risk", "Medium risk", or "Low risk" in terms of their exposure to the rules. However, these were not well received by business groups, who complained that the guidelines were counter-productive and complex. Critics have also pointed out that IR35 reviews in 2010 yielded only GBP200,000 (USD324,000).

TAGS: compliance | tax | tax compliance | tax avoidance | employees | United Kingdom | contractors | professionals | self-employment | legislation | tax reform | legislation amendments

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