August 8, 2012

I’m a firm believer in the Oliver Wendell Holmes theory that “taxes are the price we pay for civilisation”.  As a retired Tax Inspector, you’d expect that.  I have no patience with tax arbitrage, tax avoidance schemes and tax evasion, and even less patience with any attempt to persuade the tax authorities to be less than even handed in collecting the right amount of tax – neither too much nor too little – from everyone, no matter how big or small their business.

Nor do I have any patience with big business whining about how much tax they pay, particularly when they include the PAYE they collect for the government but which is actually paid by their employees, or the VAT they also collect for the government but which is paid by the end user of the products they sell.

So I’m not really an impartial reader of the Taxation of Controlling Persons consultation document, which is full of soothing words about how we don’t doubt that people use personal service companies for all sorts of legitimate reasons (to which I say: name one!) but we’d rather like them to stop doing it if they’re, you know, the head of the BBC or the head of the Student Loans company or someone else who might come back to embarrass us.


Personal service companies are, essentially, one man companies.  So if I want to be head of Company Ltd but don’t want to pay tax on my gazillion pound salary, I arrange for Company Ltd to buy in management services from a little company called “Worker Ltd”.  And the fact that Worker Ltd happens to belong to me, and the services that Company Ltd buys from Worker Ltd are the managements services of, er, me…

The reason that might be good for me is that Company Ltd pays Worker Ltd the gazillion pounds it is happy to pay for my services but without deducting tax – it’s a company-to-company payment for services, rather than an employer-to-employee payment of wages.  And then, because Worker Ltd belongs to me, I can decide whether it pays me a minimum wage salary and sticks the other gazillion in the bank for later, or pays me my gazillion and pays the tax on it.  And the reason this might be good for Company Ltd is that they can pay my company for my services without having to worry about such trivialities as employer’s National Insurance, employment legislation (so there’s no sick pay or holiday pay due to me from Company Ltd, it all comes out of my Worker Ltd company) and there’s no unnecessary fuss about, say, equal opportunities or redundancy legislation if Company Ltd wants to get rid of me, they just tell Worker Ltd they don’t want any services this week, thanks.

There’s legislation to stop the Worker Co from sticking its money in the bank and saying nya nya nya to the tax authorities: it’s called IR35 (after the leaflet that introduced it) but basically it says, imagine Worker Co didn’t exist: would Company Ltd have to pay deduct PAYE before it paid me?  If so, then you ignore Worker Co and Company Ltd has to pay the PAYE.  It’s not popular and, frankly, it doesn’t always work, but at least it’s there.

Essentially this consultation is a result of the government giving up on the idea it can ever come up with a way of defining employment that will do away with this kind of disguised employment and saying simply that, if the person with the service company is in a position to control Company Ltd, then let’s apply IR35-ish rules.

Personally I think they ought to grasp the nettle and be about a million per cent more bullish about what we mean by employment/self-employment and kill off these service companies altogether.  But that’s not going to happen – the people who use service companies are too well organised an interest group, and anyway it’s a useful tax dodge for lots of rich people, and only the little people pay taxes anyway…

Ahem.  I hadn’t realised I felt quite so strongly about this one!

Anyway, here’s what I sent in response to the consultation.  As ever, feel free to adopt, adapt or otherwise recycle if you wish.

This is an individual’s response and is also online (with commentary) at my blog, http://tiintax.com. I have answered your specific questions: where I have not included a question below it is because I have nothing to add. However I would additionally add that the impact assessment at page 14 of the document is so thin as to be virtually useless and as a result it does not provide the necessary information to allow the costs/benefits of this proposal to be assessed. The exemption for micro businesses is ambiguously worded and as a result the small firms impact test is incomplete. No sectoral impacts have been explored, when in fact there must be existing data on where and how this measure will impact – presumably on the civil service and on broadcasters? This should be explained in the economic impact field and would enable a more constructive engagement with the relevant sectors.

Q1 Is creating a provision which would require the engaging organisation to deduct income tax and National Insurance at source a correct and proportionate solution to this problem?

Yes, under certain circumstances. For government and quasi-government organisations (eg the head of the Student Loans organisation) I would argue that legislation is unecessary: all that is required is for the government to declare that it will not acquire services via service companies and that anyone working in a government department or quango is an employee and will be paid via PAYE. Where it is, for example, buying in IT or other services (such as the HMRC Aspire contract) then there should be clear blue water between the people providing services under that contract and government employees. Contractors would not, for example, have desk space in or security card access to government buildings. If they do, then they are employees and should be treated as such.

Q3 Are there alternative approaches that would better deliver the transparency the Government is seeking in the taxation of controlling persons than requiring them to have income tax and National Insurance deducted at source by the engaging organisation?

Yes: although a “control” provision is useful, a timing provision would also be useful. Anyone who works for the same organisation for more than (say) three months should be a deemed employee. If a genuine contract for services is in place then different staff would be able to provide the service.

Q6 Is someone who has managerial control over a significant proportion of the workforce and/or control over a significant proportion of the organisations budget the correct delineation for a ‘controlling person’?

No: what about (say) the head of a policy team in HMRC? They might control only a few staff and a small budget, but “own” a significant slice of the tax code. Similarly someone like the head of a minority channel or a commissioning editor at a broadcasting organisation might not direct a significant number of staff and the contractual arrangements might mean they did not directly control a large proportion of the budget, but by setting the policy or direction in which commissions are awarded might control a significant part of the organisation.

Q7 Should we extend controlling person to bring a larger group within the remit of this provision? If so who and why?

As above: people who control the ethos, policy or practice of the organisation should be included.

Q8 Should controlling person be narrowed so that fewer people are within its remit? If so who should be additionally excluded and why?


Q10 Is there any reason we should not exclude micro businesses, who are not part of a group structure from this provision?

In case it doesn’t quite “go without saying”, clearly it is right to exclude micro businesses who are not part of a group structure when they are the payers/engagers. Equally, it is not right to exclude micro businesses who are the payees/engagees!

Kind regards

Wendy Bradley

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