Proposed New Rules on the Provision of Personal Services
Summary of Modified Approach
The purpose of the proposed new rules remains to remove opportunities for the avoidance of tax and Class 1 National Insurance Contributions (NICs) by the use of intermediaries, such as service companies or partnerships, in circumstances where an individual worker would otherwise be an employee of the client or the income would be income from an office held by the worker.
The rules are not intended to prevent workers from providing their services through intermediaries. However, they will help to discourage the practice of routing engagements through intermediaries simply in order to take advantage of a tax and NICs regime which may be more favourable than that which would apply if the worker were to be taken on as a direct employee of the client.
Identifying engagements where the new rules will apply
It is proposed that the new rules will:
- apply to engagements (‘relevant engagements’) where:
- a worker provides services under a contract between a client and an intermediary; and
- but for the presence of the intermediary, the income arising would have been treated as coming from an office or employment held by the worker under the existing rules used to determine the boundary between employment and self-employment income for tax/NICs purposes, if the individual had contracted directly with the client.
Guidance on the existing rules is included in Inland Revenue leaflet IR56 (available on the Internet at www.inlandrevenue.gov.uk). The rules will be applied in respect of each engagement, in the same way as they apply to individuals who operate without intermediaries.
- not apply to such engagements where :
- the client is an individual and not in business (so services for a householder should not be affected); or
- the worker only receives income from the intermediary in a form which falls within Schedule E/Class 1 (e.g. straightforward employees of consultancy firms) and has no other rights to income or capital from the intermediary. Exceptions will be made for income from certain investments (e.g. holdings of small numbers of shares in the employing company). Similar rules are under consideration to exempt partners in larger partnerships.
Tax and NICs treatment where the new rules apply
Under the modified approach intermediaries, and not clients, will be responsible for operating the legislation. It will not be necessary for clients to check whether the legislation applies when they enter into a contract with an intermediary, or to conduct new checks on the status of the intermediary. There will be no certification scheme.
The intention is that all the money received by the intermediary in respect of a relevant engagement, minus certain deductions listed below, should be treated as paid to the worker in a form subject to Schedule E tax and Class 1 NICs.
The intermediary
(a) Intermediaries who are companies
Where a company intermediary receives income in respect of a relevant engagement, then :
- the intermediary will operate PAYE and pay NICs on payments of salary to the worker during the year, in the normal way.
- If, at the end of a tax year, the total of the worker's employment income from the intermediary, including benefits in kind, amounts to less than the intermediary’s income from all that worker’s relevant engagements, then the difference (net of allowable expenses described below) will be deemed to have been paid to the worker as salary on 5 April, and Schedule E tax/NICs will be due.
- Where salary is deemed in this way:
- appropriate deductions will be allowed in arriving at Corporation Tax profits; and
- no further tax/NICs will be due if the worker subsequently withdraws the money from the company.
(b) Where the intermediary is a partnership
Where a partnership receives gross payment under a relevant contract:
- Income of the partnership from all relevant engagements in the year (net of allowable expenses described below) will be deemed to have been paid to the worker on 5 April as salary from a deemed employment held by the worker, and Schedule E tax /NICs will be due accordingly.
- Any amount deemed to be income within Schedule E/Class 1 under (i) above will not be included when computing the worker’s share of Schedule D partnership profits.
However, the Inland Revenue’s current practice of including small amounts of Schedule E income in the calculation of Schedule D profits for the self employed, including partners, will apply also in these cases.
Expenses
It is proposed that an intermediary should be allowed to deduct the following expenses from payments in respect of a relevant engagement in calculating whether any deemed payment is required:
- all expenses otherwise eligible for deduction under the normal Schedule E expenses rule (S198 ICTA 1988): ie qualifying travelling expenses and those expended wholly, exclusively and necessarily in the performance of the duties of the employment (guidance on the expenses rules is included in Inland Revenue booklets 480 and 490 (available on the Internet at www.inlandrevenue.gov.uk)) ; plus
- any employer pension contributions made to an approved scheme which are allowable under normal rules; plus
- a further flat rate 5% of the gross payment for the relevant contract to cover other miscellaneous expenses, such as running costs of the intermediary;
- the amount of employer’s NICs paid during the year, plus any due on the deemed payment.
Failure cases
Where an intermediary fails to deduct and account for PAYE/NICs on payments to the worker under the new rules, the normal penalty provisions for employer failures will apply. If the intermediary does not meet its obligations to account for PAYE/NICs then the amount may be collected from the worker - as happens in certain circumstances under existing PAYE and NIC legislation.
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