A new draft clause for inclusion in the Finance Bill 2013 explicitly extends the scope of IR35 to ‘office holders’ for the first time.
The draft legislation, which can be downloaded from the HM Treasury website here (PDF – Page 193), details how the Intermediaries Legislation will be amended to extend the scope of the existing rules to office holders.
This change was first mentioned in the Autumn Statement documentation, as part of the Government’s attempts to ‘strengthen’ IR35, to ensure that no individuals will be able to undertake ‘disguised employment’, whatever position they hold in an organisation.
The controversial ‘controlling persons’ proposals, which would have forced organisations to tax ‘influential’ interims and consultants via the payroll, were abandoned last week, to be replaced by this amendment to the existing IR35 legislation.
Prior to this amendment “an office holder would not be considered to be an employee so an office holder engaged via an intermediary would not come within this legislation.”
The technical explanation
Chapter 8 or Part 2 of the ITEPA 2003 will be updated as follows:
“The extension applies both where the worker is named as an office holder of the client but paid through an intermediary and where the intermediary (third party) is named as the office holder of the client. It applies in each case where the worker would be considered as an office holder of the client if the services were provided directly under a contract between the worker and the client.”
“In the situations described above, providing there is also a requirement for the personal service of the worker, this clause brings into charge for income tax, as the worker’s deemed earnings from employment, any payment made to the worker via an intermediary (third party).”
The ‘controlling persons’ proposals were widely criticised for being unworkable in practice, and unnecessary – as IR35 already exists to deal with cases of disguised employment. What difference will the inclusion of office holders into IR35’s scope actually make?
Seb Maley, from Qdos Consulting, explained that an ‘office holder’, as defined in HMRC’s status manual is a ‘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.’
Maley also told us he understands “that the extension to the current legislation will require not only for the person to be an office holder but also their personal service for IR35 to apply.”
NICs / Income Tax anomaly
Kate Cottrell from employment status experts Bauer & Cottrell, says that the new clause will mean that office holders will now become liable for both National Insurance Contributions and income tax if they are caught by IR35.
“Essentially there are NIC deeming provisions for certain occupations. Prior to this new tweak to the IR35 legislation, directors were deemed as Office Holders for NIC purposes so caught by IR35 for NIC but not necessarily caught for tax. There have always been example calculations showing how to work out the IR35 deemed payment in these situations.
“Over the years we have advised many in this respect especially actors as it is often the case that some folk have never heard of IR35 let alone heard of any special NIC rules and their impact.”