There was good news in the Budget for those that feared that the Government might use the opportunity to announce proposals to reverse all the tax advantages of personal service companies. The Government is merely to consult on the tax treatment of workers using service companies to provide services to the private sector.
The tax savings which come from using service companies for individuals to provide services are well known. Although these arrangements are not just about tax, and in many cases it is the ultimate client rather than the individual or personal service company that benefits from any tax and NIC savings, the Government has for some time been concerned about the unfair advantage that higher paid individuals receive through using these arrangements.
Since 2000, under what became known as “IR35”, legislation has been in place to counteract tax savings where using a service company is really employment in disguise. Payments made to the service company are treated as employment income and a PAYE charge arises accordingly. However, HMRC has never really seen this as having successfully addressed the issues and many payments escape PAYE.
Earlier this year the law in this area was dramatically changed for public sector users of service companies. Traditionally the tax risk and requirement to operate PAYE lay on the service company, but now a public sector client engaging an individual using a service company has to check the position itself and undertake a substantial paperwork burden before it can make payments without operating PAYE. A public sector client bears all the tax risk of operating PAYE incorrectly. Anecdotally we hear that public sector clients are taking a much more cautious approach and subjecting far more payments to PAYE than the service companies would have subjected to tax in this way.
It is probably on this basis that the Government says that early indications are that the public sector rule changes have been effective in reducing tax leakage, and it no doubt wants to apply those rules to the private sector. Equally, the Government is also moved by complaints from the public sector that they are now disadvantaged in engaging service companies – as service companies would rather work with private sector than public sector clients, or they charge more to work with public sector clients.
The consultancy sector has a loud voice (and unlike public sector clients, private sector clients who engage these service companies will be able to speak up against the changes). Any extension of the new rules to the private sector is therefore likely to be hotly contested. Bringing this legislation to the private sector is likely to have much more impact on the personal service company industry than the extension to the public sector earlier this year.
The Government has also separately announced that it will be publishing its response to the Taylor review. Its response will not just be limited to tax and will cover broader employment issues.
Accordingly, it seems likely that within a year we will see proposals counteracting alternative structures to employment both for the higher and lower paid users of these arrangements. Quite whether and when any proposals will proceed to legislation is another matter as there are strong commercial interests at play and difficult employment law and benefit issues to consider.
Nicholas Stretch is a tax Partner with law firm CMS
