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.
