In May of last year, HMRC published a consultation document, 'The Taxation of Controlling Persons', which was borne out of the furore created by the Ed Lester affair and the recommendations from the review of public sector staff. It was proposed that legislation would be introduced in Finance Bill 2013 which would compel the engager to place all controlling persons on the payroll ensuring that that person was taxed in the same way as employees of the organisation. Unlike IR35 the responsibility for correctly applying PAYE and NICs would have been that of the engager which the Government hoped would remove some of the incentive for organisations to encourage some workers to operate through PSC.
The proposals were, however, criticised as being overkill and unnecessary, and especially after the recent rules introduced for public sector appointees. Thankfully the penny dropped with the Government when it was announced in the Autumn Statement later that year 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. However, the Government is strengthening the existing intermediaries’ legislation (IR35) to put beyond doubt that it applies to office holders for tax purposes. The Government will keep this area under review.'
To date duties performed as an office holder do not fall within the IR35 legislation, although NIC's still apply to the fee's received from such a role. That is all about to change however from April of this year when Chapter 8 of Part 2 of the Income Tax (Earnings and Pensions) Act (ITEPA) 2003 will be amended by a draft clause contained in Finance Bill 2013 that will extend the application of IR35 to office holders provided there is also a requirement for the personal service of the worker.
Whilst there is no statutory definition of the word 'office', there is a judicial definition laid down in the 1922 case of Great Western Railway Company v Bater and which is referred to in HMRC's Employment Status Manual 2502; 'permanent, substantive position which had an existence independent from the person who filled it, which went on and was filled in succession by successive holders.'
In the 1981 case of Edwards v Clinch, Lord Wilberforce considered whether the definition was still appropriate. He accepted that a rigid requirement of permanence was no longer appropriate and continuity need not be regarded as an absolute qualification. However, the word must involve a degree of continuance and of independent existence. It must mean or imply, “a post to which a person can be appointed, which he can vacate and to which a successor can be appointed.”
Employment Status Manual 2503 explains how 'an office is created by a charter, statute, or other document which is, or forms part of, the constitution of an organisation or which governs its operation. For example, a director of a company is an office holder because the Companies Act requires a company to have a board of directors and similarly all companies are required to have a company secretary. There is no statutory definition of 'director' but the term includes executive, non-executive and nominee directors.' Spot the mistake? Members of the IR35 Forum did last month when they pointed out to HMRC that company law no longer compels a private company to appoint a company secretary and which has been the position since 6th April 2008.
The IR35 Forum asked HMRC at the recent meeting in January whether the proposed legislation will apply to company secretaries. In such cases, HMRC said that they will look at the terms and conditions where a personal service company is acting as company secretary on behalf of its client.
Those same Forum members missed an opportunity however to quiz HMRC as to whether or not they intend to issue definitive guidance as to who and what an 'office holder' is for IR35 purposes before the legislation kicks in, in just over a month. A two week window was, however, afforded to members who wished to make representations on the proposed legislation which HMRC promised to consider and, if appropriate, take remedial action before publication of the Finance Bill.
Hopefully, HMRC will provide a substantive definition of what an 'office holder' is before the amended legislation takes effect, otherwise it will just add another layer of ambiguity to an already grey piece of tax law.
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