House of Lords report on Personal Service Companies and their taxation
http://ow.ly/vztfQ
Archive for the ‘UK Employment Law’ Category
House of Lords Report on Personal Service companies
April 8, 2014Breakdown in the working relationship: a fair dismissal? (TLT LLP)
April 2, 2013Breakdown in the working relationship: a fair dismissal?
Updated March 2013
In the case of Handshake v Summers the Employment Appeal Tribunal (EAT) has concluded that a dismissal by reason of a “breakdown in working relationships” was unfair.
Background
In order to successfully defend an unfair dismissal claim, an employer must demonstrate that:
(a) there is a potentially fair reason for the dismissal; and
(b) the employer acted reasonably in treating that as a sufficient reason to dismiss the employee.
There are five potentially fair reasons for dismissal: conduct, capability, redundancy, breach of a statutory restriction and some other substantial reason (SOSR).
SOSR has a potentially broad remit. Previous case law has shown that a breach of trust and confidence and a subsequent breakdown of the working relationship can, depending on the circumstances, amount to an SOSR.
Facts
Mr Summers was one of three senior managers at Handshake Limited. At the outset of his employment no terms and conditions were formalised, however he did receive an offer letter. The offer letter stated that Mr Summers would receive 30% of the issued share capital of the company.
A long running dispute arose in relation to Mr Summers’ share entitlement, the disagreement focusing around the correct assessment of the company’s net profits and the calculation of Mr Summers’ 30% share.
The dispute involved numerous meetings and correspondence between solicitors and eventually, after six years of unsuccessful attempts at reconciliation, Mr Summers was dismissed. The reason cited for the dismissal was a breach of trust and confidence and a breakdown in the working relationship.
Decision
What amounts to a breach of trust and confidence and a breakdown of the working relationship is a question of fact for the Tribunal. The EAT held that there was no such breakdown here and therefore Mr Summers’ dismissal was unfair.
The EAT noted that Mr Summers remained cheerful and friendly throughout the dispute and both parties were very amicable and had a good relationship. Consequently it could not be said that there was a breakdown in this relationship, despite letters from Mr Summers’ solicitor expressly stating the contrary. There was also nothing untoward about the way in which the debates were conducted to suggest a breach of trust and confidence.
The EAT commented that power struggles, tension and disagreements are not a breach of trust and confidence or a breakdown in the working relationship and therefore not a fair reason for dismissing an employee.
Comment
Whilst a breakdown in the working relationship has been held to amount to SOSR, it is unusual for it to be accepted as fair where it is the sole reason for dismissal.
What actually amounts to a breakdown is unclear and case law demonstrates that Tribunals take a robust approach to avoid reliance on this as a catch-all reason for dismissal. The Tribunal noted that it would be dangerous for disagreements in the workplace (particularly in relation to terms of employment) to amount to a breach of trust and confidence that could then be relied upon as a reason for dismissal as this would deter employees from asserting their rights and raising queries.
Breakdown in the working relationship and breach of trust and confidence are both difficult to prove and difficult to rely on as a fair reason for dismissal. Employers should bear this in mind and exercise caution when considering a dismissal on the basis of one or both of these reasons and perhaps look to rely on one of the other four reasons for a fair dismissal.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2013. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.
TLT LLP is a limited liability partnership registered in England & Wales
Seven year ban for payroll boss who left £15m hole in accounts (Insolvency Service)
April 2, 2013Seven year ban for payroll boss who left £15m hole in accounts
27 March 2013 09:30
A Hertfordshire resident Greg John Middleton, director of Sigma Labour Services Limited, a company that provided payroll services in Essex, has been disqualified from acting as a director for seven years for failing to keep proper accounts, which meant transactions worth £15m went unexplained.
The disqualification follows an investigation by The Insolvency Service.
Mr Middleton, 43, of Rickmansworth, Hertfordshire has given an undertaking that he will not act as a director of a limited company from 1 April 2013 to April 2020.
Sigma Labour Services Limited entered voluntary liquidation on 20 May 2011. The Insolvency Service investigation found that the company’s records failed to:
• establish when it had started trading;
• the extent and nature of the company’s business; or
• explain £15,000,000 of transactions in and out of the company’s bank account.
This lack of a proper paper trail also meant it was not possible to establish the company’s true tax debt.
Commenting on the disqualification, Mark Bruce, a Chief Examiner in Company Investigation Team South at The Insolvency Service said:
“The substantial period of this disqualification reflects the fact that when a company fails to keep adequate financial records, it could lead to other, more serious, impropriety in relation to the management of its affairs. The sheer scale of unexplained transactions during the last 11 months of this company’s trading raises serious questions.
“Directors have a vital duty to keep proper records, especially when a company is experiencing financial difficulties. Directors who neglect this responsibility damage business confidence and are bad for growth. The Insolvency Service will seek to remove them from the business environment.”
Notes
1. Sigma Labour Services Limited was incorporated on 14 May 2009 and went into voluntary liquidation on 20 May 2011.
2. Mr Middleton gave an undertaking on 11 March 2013 to the Secretary of State not to be a director for seven years. The disqualification commences on 1 April 2013.
3. Disqualification undertakings were introduced in April 2001, they are the administrative equivalent of a disqualification order but do not involve court proceedings. Without specific permission of a court, a person with a company directors disqualification, including undertakings, cannot act as a director of a company; take part, directly or indirectly, in the promotion, formation or management of a company; be a liquidator or administrator of a company; or be a receiver or manager of a company’s property.
4. Further information on director disqualifications and restrictions can be found at http://www.bis.gov.uk/insolvency/Companies/insolvent-companies.
5. The Insolvency Service administers the insolvency regime investigating all compulsory liquidations and individual insolvencies (bankruptcies) through the Official Receiver to establish why they became insolvent. The Service also authorises and regulates the insolvency profession; deals with disqualification of directors in corporate failures; assesses and pays statutory entitlement to redundancy payments when an employer cannot or will not pay employees; provides banking and investment services for bankruptcy and liquidation estate funds; and advises ministers and other government departments on insolvency law and practice. Further information about the work of The Insolvency Service is available from http://www.bis.gov.uk/insolvency.
A first class degree in discrimination (TLT LLP)
March 1, 2013A first class degree in discrimination
Updated February 2013
In an important case, an Employment Tribunal has decided that a requirement that employees hold a law degree in order to move up through structured pay grades was not objectively justified. Therefore, the requirement constituted indirect age discrimination.
The employer failed to show that clients of the service in question had requested improvements to the quality of advice offered. In addition, clients had not asked for advice to only be provided by someone with a law degree. The Tribunal also concluded that the employer had overstated the problems of applying a more lenient rule to existing staff.
Employers should be alert to the fact that Tribunals will carefully scrutinise whether a less-discriminatory course of action could be adopted when applying certain provisions, criteria or practices in the workplace.
Facts
After serving as a police officer for 30 years, Mr Homer chose to pursue a career as a legal adviser in the Police National Legal Database (PNLD) for the West Yorkshire Police (the Police). As a requirement of this post, legal advisers needed to have either:
a law degree (or similar); or
exceptional experience/skills in criminal law.
Mr Homer did not hold a law degree but he was appointed to the role in 1995 because of his exceptional experience in criminal law matters.
A decade later, the PNLD was struggling to recruit and retain individuals in legal posts. Therefore, it decided to increase salaries and introduce a formal career structure in order to alleviate the problems.
In order to reach the third tier of the revised career structure (and therefore receive an increase in salary), an individual had to hold a law degree (or similar). It was no longer enough to have exceptional experience.
The Police’s default retirement age at the time was 65. Therefore, because of Mr Homer’s age, he would not be able to obtain a degree before reaching the default retirement age. Mr Homer would not be able to become a level three advisor and would not be able to receive any corresponding pay rise.
Mr Homer argued that this was indirect discrimination because of his age. After some legal challenges, Mr Homer’s case reached the Supreme Court which decided that the Police’s requirement was capable of indirect discrimination.
The Supreme Court sent the case back to a Tribunal to decide whether the Police’s requirement was objectively justified (i.e. was it a proportionate means of achieving a legitimate aim).
Decision
The Tribunal decided that the Police could not justify its requirement that level three advisors hold a law degree. Therefore, Mr Homer succeeded with his indirect age discrimination claim.
The Police put forward an argument that the new career structure was to ensure the right calibre of candidates was recruited in order to improve the quality of the service it offered.
Mr Homer contended that, although the Police wanted to recruit highly qualified staff, existing staff (like himself) could have been exempted from the need to obtain a degree. The Police argued that having different requirements/terms for existing staff and new starters was illogical and fraught with problems (including employee relations issues). However, the Tribunal was not convinced that this was the case. It used the example of employees being on different pension schemes following the closure of a final pension scheme to new members (but allowing existing employees to remain in the old scheme).
Although the Tribunal accepted that a legal adviser with a law degree may be of a better calibre than one without, it did not consider that it was necessary to require existing legal advisers to hold a law degree (and so be enabled to move up to the third tier of the career/pay structure). Importantly, the Police could not show that its current clients had requested better qualified legal advisers or that its prospective clients were insisting on advice only being given by a law graduate. In addition, there was no evidence that legal advisers would be poached by competitors if the Police made an exception to the requirement for existing staff.
The Tribunal pointed out that it was not deciding that a special exception should have been made for Mr Homer (since by doing this the Police may well have discriminated against younger workers). Instead, the Tribunal made clear that different requirements could have applied to all existing legal advisers as against new recruits. The Tribunal decided that the Police overstated the problems that might have been caused by being more lenient with existing staff.
Comment
This case is a reminder that a Tribunal will scrutinise an employer’s rationale for introducing a provision, criterion or practice that indirectly discriminates against an individual. Such rationale should be based on reasonable, logical business grounds and, where possible, be supported by appropriate evidence. Furthermore, the business grounds for such requirements must be necessary and employers should be well-equipped to demonstrate why this is the case.
The principles of this case stretch wider than the facts suggest. For example, employers can commonly require employees to hold certain qualifications as part of a redundancy restructure process where new posts are being created (which may indirectly discriminate against older individuals). In such a case employers should have very clear evidence of the reasonable business grounds for any such requirement (for example by referring to clients’ needs/requirements). This will assist with demonstrating that the requirement is proportionate as well as legitimate.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at February 2013. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.
TLT LLP is a limited liability partnership
The Danny Alexander review & ‘controlling persons’: a genuine threat to the future of Interim Management?
August 8, 2012The Danny Alexander review & ‘controlling persons’: a genuine threat to the future of Interim Management?
If you are a career interim and are not aware of the Danny Alexander review and HMRC Consultation on ‘Controlling persons’, then you definitely need to read this blog!
The review and consultation are a knee-jerk reaction to the political hot potatoes of tax avoidance and executive pay which has come about after Ed Lester, acting Chief Executive at the Student Loans Company, was revealed to be an interim on a daily rate for three years.
It appears that the Treasury and HMRC feel that their own poorly-written law; IR35, ‘remains the correct approach’ to tax poorly-managed interim assignments but admits that ‘IR35 can be difficult to understand’. Confusingly, the government do not feel that this is the case with what they call ‘controlling persons’ or people in the public eye who can cause embarrassment to a government who are tough on success and tough on the causes of success.
Therefore, the government would like to introduce a new raft of legislative sledgehammers to crack this particular nut, by insisting that all interim executives are taxed by the engaging client at the same rate as an employee.
Should it come to pass, this legislation would effectively kill the interim market as we know it. In doing so it would deal a very severe blow to UK Plc as some of our most talented and experienced executives would suddenly be tied to one organisation rather than spreading their expertise across a number of businesses purely when they are needed or worse, they would claim unemployment benefits or take their taxes off-shore.
Has the government really thought about the amount of jobs and therefore tax income that interims create or save, by helping businesses grow or orchestrating a turnaround in their fortunes? I suspect not.
If, as a professional interim, you value your independence, your ability to add value to a range of clients at the same time and don’t wish to be forced into early retirement or an unsatisfying permanent job I suggest you start to lobby your local MP and ensure they understand the commercial and fiscal benefits of the interim market to UK Plc. The IMA and the IIM are presenting their response to the Treasury and HMRC but we need to mobilise the support of interim managers individually to get this poorly thought-out legislation off the agenda.
Court of Appeal decision in NHS Leeds v Larner (TLT LLP)
July 30, 2012http://www.lease-a-finance-director.co.uk
Annual leave for sick workers – the end of “Use it or lose it”?
Updated July 2012
It has been a long-running saga over whether workers who have been absent on long-term sickness are entitled, on termination, to payment in lieu of accrued but untaken leave from previous leave years. A major step towards resolution has occurred following the Court of Appeal decision in NHS Leeds v Larner, reported yesterday.
In Larner, the Court of Appeal addressed two key questions:
(i) If a worker is unable or unwilling to take annual leave as a result of sickness, must they request that it is rolled over to the following leave year?
(ii) On termination, is the worker entitled to payment in lieu of any untaken leave from previous leave years?
Background
The Working Time Directive (the Directive) provides that member states must ensure that every worker is entitled to paid annual holiday of at least four weeks. This is implemented in Great Britain by regulations 13 to 16 of the Working Time Regulations 1998 (WTR), which provide workers with the right to take 5.6 weeks’ paid holiday in each leave year. (4 weeks of this leave is conferred by regulation 13. The additional 1.6 weeks are conferred by regulation 13A).
Under the WTR:
The first four weeks’ statutory holiday may only be taken in the leave year in respect of which they are due, and may not be replaced by a payment in lieu except on termination of employment (regulation 13(9)).
Subject to the employer’s right to give “counter-notice”, a worker may take statutory holiday by giving notice to the employer (regulation 15(1)).
Workers are entitled to be paid in respect of any period of holiday to which they are entitled under regulation 13 at a rate of a week’s pay for each week’s holiday (regulation 16(1)).
Facts
Mrs Larner was employed by NHS Leeds. She was absent on sick leave for the whole of the leave year 2009/10. During that year she neither took paid annual leave nor did she request NHS Leeds to carry it forward to the next leave year (2010/11). Her employment was terminated in April 2010 on grounds of incapability due to her continuing ill-health. NHS Leeds refused to pay her for the leave not taken by her in 2009/10.
The Employment Tribunal upheld Mrs Larner’s claim for payment in respect of the statutory holiday entitlement that she did not use during her sickness absence. NHS Leeds’ appeal to the EAT was dismissed.
NHS Leeds appealed to the Court of Appeal on the grounds that it was for Mrs Larner to make a request, either to take her paid annual leave during her period of sickness absence, or to carry it forward. NHS Leeds’ argument was that the law on leave entitlement effectively allows an employer to say: “use it or lose it”. It argued that since Mrs Larner did not make the requisite request, her entitlement to paid annual leave from previous holiday years was lost.
Decision
The Court of Appeal dismissed the appeal, holding that Mrs Larner was entitled to carry her untaken paid annual leave forward to 2010/11 without making a prior request to do so. In its judgment, the Court provides important guidance on the interpretation of the Directive and the WTR, and expressly confirms that this obligation extends to the private sector.
Comment
As a result of this case it is now clear that where, as a result of sickness, a worker is unwilling or unable to take the four weeks’ annual leave provided by regulation 13 WTR they must be allowed to take it another time, in a later leave year if necessary. It is not necessary for the worker to submit a request to this effect. Where such leave remains untaken on termination, the worker must be compensated for it, even if it relates to previous years’ leave entitlement.
The Court of Appeal declined to reach a finding in respect of the additional 1.6 weeks’ leave conferred by reg 13A WTR. Reg 13A provides that additional leave may be carried over if there is provision to do so in a “relevant agreement” – typically, a collective agreement or contract of employment.
The Larner judgment will no doubt be fed into the “Consultation on Modern Workplaces” process launched by the Government in May 2012, which proposes that workers on sick leave should be able to carry untaken leave over to a following holiday year.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2012. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.
TLT LLP is a limited liability partnership registered in England & Wales number OC 308658 whose registered office is at One Redcliff Street, Bristol BS1 6TP England.
What counts as redundancy? (TLT LLP)
July 6, 2012http://www.lease-a-finance-director.co.uk
What counts as redundancy?
Updated July 2012
The Employment Appeals Tribunal (EAT) has decided that there does not have to be a reduction in the number of employees carrying out work of a particular kind in order to satisfy the statutory definition of “redundancy”.
The EAT’s decision has resolved previously inconsistent case-law. While each situation will need to be judged on its own facts, a redundancy situation is possible if there is a reduction in the work done by employees but no numerical reduction in the number of employees.
The decision also reflects the industry practice of HR professionals adopting a full-time equivalent (FTE) approach when considering the question of hours and number of employees. In other words, where the hours of two full-time employees are reduced to 50% but both continue work, then there is a reduction in headcount adopting a FTE approach.
Background
A redundancy situation can arise where:
a workplace closes;
a business closes;
business requirements for employees to carry out work of a particular kind will, or are expected to, cease or diminish.
The case of Packman t/a Packman Lucas Associates v Fauchon was a case that dealt with the third redundancy situation outlined above.
Facts of the case and the Tribunal’s decision
The Claimant, Ms Fauchon, was a book-keeper at Packman. Following a downturn in business and the company’s introduction of an accountancy software package, Fauchon was required to work a reduced number of hours
Packman tried to reduce Fauchon’s hours. However she refused and was eventually dismissed.
The Tribunal decided that the downturn in business meant there was a diminishing need for book-keeping. As Fauchon did not agree to the reduction of her working hours, the reason for her dismissal was redundancy and she received a statutory redundancy payment.
In reaching its decision, the Tribunal disregarded an earlier EAT case, Aylward v Glamorgan Holiday Home Ltd EAT/0167/02, and explained that this decision has always been questioned. Aylward had decided that there must always be a reduction in headcount of employees performing work of a particular kind for redundancy to apply.
Packman appealed against the Tribunal’s decision on the basis that it should have followed Aylward (because it was an EAT case and therefore the Tribunal was bound to follow it).
Decision
Packman’s appeal was dismissed. The EAT decided that headcount does not necessarily need to reduce in order for there to be a redundancy.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2012. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.
TLT LLP is a limited liability partnership registered in England & Wales number OC 308658 whose registered office is at One Redcliff Street, Bristol BS1 6TP England.
The Taxation of Controlling Persons
June 19, 2012The Taxation of Controlling Persons
Consultation document
Publication date: 23 May 2012
Closing date for comments: 16 August 2012
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Subject of this consultation:
This is a consultation about the engagement practices of controlling persons. It proposes that a provision is introduced to ensure that controlling persons have income tax (PAYE) and National Insurance deducted at source by the engaging organisation.
Scope of this consultation:
The purpose of this consultation is to explore whether this is a necessary and appropriate way of achieving this aim and to test whether the provision is sufficiently targeted and without unexpected detrimental effects.
Who should read this:
Duration:
Start date 23 May 2012 Finish date 16 August 2012
Lead official:
Sarah Radford
How to respond or enquire
about this consultation:
Comments on this consultation should be sent by 16 August 2012 by email to Sarah Radford at the following email address: sarah.radford@hmrc.gsi.gov.uk
Or alternatively by post to:
Sarah Radford
1E/09
100 Parliament Street
London
SW1A 2BQ
Additional ways to be involved:
We will hold meetings with relevant stakeholders to discuss this provision if you wish to be involved in one of these meetings please contact Sarah Radford using the details above.
After the consultation:
We will publish the results of the consultation. Dependent on the results of this consultation there may need to be a further consultation on the draft legislation. If appropriate, the intention is that any provision would then be legislated for in Finance Bill 2013
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Contents
1
Executive Summary
5
2
What is the issue?
6
3
What is the proposed solution?
11
4
Defining a ‘Controlling Person’
13
5
Tax Impact Assessment
14
6
Summary of Consultation Questions
15
7
The Consultation Process: How to respond
16
Annex A
The Code of Practice on Consultation
18
Annex B
Relevant current Government Legislation
19
On request this document can be produced in Welsh and alternate formats including large print, audio and Braille formats
Foreword
As a Government, we want there to be a simple and transparent tax system. This is why we have brought forward a number of measures aimed at simplifying the tax system and helping people to understand what tax they are paying and what their tax money is being spent on.
At the same time, we want to ensure that everybody pays the right amount of tax, at the right time. This is why at the last spending review we increased HMRC’s funding by £900 million over the spending review period to tackle tax avoidance, evasion and minimisation.
The Chief Secretary to the Treasury launched a review into the tax arrangements of public sector appointees on 31 January 2012 with a view to ascertaining the extent of arrangements which could allow public sector appointees to minimise their tax payments. The review has concluded that there is a lack of transparency around the tax arrangements of public sector appointees, where the worker is not on the payroll of the engaging organisation.
The recommendations from the review are that the most senior public sector staff should be on the payroll, and that departments should have the right to seek assurance in relation to the tax arrangements of long term contractors. It is especially important in the public sector that it is transparent that tax obligations are being met.
Equally we believe that where people are in a position to control the major activities of an organisation the organisation, whether in the private or the public sector, should be able to have an assurance that the worker who is in a controlling position in the company is meeting their tax obligations. This is why we are publishing this consultation today.
David Gauke
Exchequer Secretary to the Treasury
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1.
Executive Summary
1.1
There are many cases where the use of an intermediary, often a personal service company, is for legitimate commercial reasons. Indeed, many businesses start as small limited companies. The Government is very supportive of intermediaries, including personal service companies as a cornerstone of developing business, and it does not believe that personal service companies are necessarily avoidance devices.
1.2
However, it has become increasingly clear that there is an established and growing problem with people using intermediaries to disguise employment. Working through an intermediary provides an opportunity to minimise, or in some cases avoid completely paying income tax and National Insurance that would otherwise be correctly payable.
1.3
Where someone is using a personal service company to disguise their true employment relationship with their engager, there is already high profile anti-avoidance legislation to ensure that they do not gain a tax or National Insurance advantage. The intermediaries’ legislation: Chapter 8 Part 2 Income Tax Earnings and Pension Act (ITEPA) 2003, is commonly known as IR35. This legislation requires the intermediary to pay income tax and National Insurance on all income from a contract which would be a contract of employment if it wasn’t for the interposition of the intermediary.
1.4
When IR35 was introduced 10 years ago, it was unusual for a senior/controlling person to be engaged through their own limited company. It is the Government’s view that where an individual has the requisite level of control to direct the activities of the organisation and they are engaged at a senior level (through an intermediary) then that individual should be taxed as an employee.
1.5
The Government’s intention is to ensure that where an organisation engages a controlling person the engaging organisation will be required to deduct the income tax (PAYE) and National Insurance at source, as they would for their employees. This ensures that the taxation of the worker is transparent to the engager.
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2
. What is the issue?
What is meant by an intermediary?
2.1
For the purposes of this document an intermediary is any structure that is put in place between the party for whom the work is undertaken the ‘client’ and the worker. For the purposes of this document an intermediary does not include Employment Businesses and Employment Agencies. In the situations described in this document the intermediary is usually a small limited company known as a personal service company, but it can also be a partnership or limited liability partnership.
2.2
A personal service company (PSC) is a limited company where the main shareholder is also the director and is also typically the only employee. In some cases friends and relatives are also directors, shareholders and/or employees. The PSC contracts with the client to supply the services of the director and invoices for the services of the director. For the rest of this document PSC will be used to refer to intermediaries including partnerships and limited liability partnerships.
2.3
There are a variety of different industries where it is usual for people to work through PSCs. PSCs are often used for entirely legitimate commercial reasons. The PSC may source its own work or may use a recruitment agency to source work on its behalf.
What are the tax and National Insurance implications of using a PSC?
2.4
When a limited company is engaged and paid for the services of a worker, the payment from the engaging organisation is made without the deduction of income tax and National Insurance. This is because the payment is a legitimate, invoiced, commercial transaction and there is no requirement for the payments to have income tax and National Insurance deducted even where the individual doing the work is working on terms and conditions that would otherwise make them an employee of the engaging organisation.
2.5
The PSC can deduct any allowable expenses from their gross profit and pay Corporation Tax on the net profits in the normal way. The rate of Corporation Tax for small companies is currently 20 percent increasing for larger companies to 24 percent.
2.6
Depending on how the director/shareholder then chooses to withdraw the profits from the PSC the profits can be withdrawn:
as earnings with income tax and National Insurance deducted from the money they withdraw; or
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by distributing dividends, where payments will be subject to income tax but not to National Insurance payments; or
as a directors loan.
Again, these arrangements are all perfectly legitimate and many people will use a mixture of these methods to take money out of the PSC. They can do this even where, in the absence of the PSC, they would have been an employee of the engaging organisation – and doing so in such cases means that the individual can maintain their contributory benefits and take advantage of their personal allowance. This is where the problem of tax and National Insurance may become an issue.
Growth in the use of PSCs
2.7
Individuals and businesses are always looking to operate in the most cost effective way. For a business, one of the ways that they are able to do this is by engaging people through a PSC.
2.8
A business choosing to engage people though a PSC achieves greater workforce flexibility. For example, there is no minimum notice period or requirement to make redundancy payments if the engager decides that they no longer have a requirement for that skill set. Normal commercial contracting arrangements apply.
2.9
Engaging people in this way can also generate a financial saving for the engaging business. This is because there is no requirement for the engaging business to make employer National Insurance payments for the workers – saving them 13.8 percent on earnings in excess of the secondary threshold. There are also further financial savings because there is no requirement for the engager to provide other benefits such as holiday pay, sick pay and pension contributions as they would for their other employees.
2.10
Working through a PSC also provides the worker with choices of how to withdraw the profits from the PSC, which can be done in a tax efficient way; meaning more money taken home and less money to the Exchequer. Working through a PSC also provides the benefit of more generous expenses.
Existing Legislation
2.11
During the 1990’s there was rapid growth in the number of PSCs, in many cases, for tax and National Insurance purposes. In some sectors, it was also very difficult for individuals to secure work unless they were working through PSCs as engagers sought to minimise their own National Insurance liabilities. To address this problem the then Government brought in ‘IR35’ in April 2000.
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2.12
IR35 says that where the relationship between the end client/engager and the worker would be one of employment if it wasn’t for the interposition of an intermediary (often a PSC) then the intermediary must account for the income tax and National Insurance on monies earned from that contract.
2.13
This can be done in one of two ways. The worker can simply take out of the PSC as salary the money earned from that contract and pay tax and National Insurance on those salary payments in the normal way. Where the worker chooses not to do this then, at the end of the year, the PSC is required to calculate a ‘deemed payment’ on which employee National Insurance Contributions and income tax (PAYE) are due and a deemed employer National Insurance payment.
2.14
The way of computing the deemed payment is prescribed by legislation and it ensures that what would have been income derived from employment if it wasn’t for the interposition of an intermediary is taxed as such, in the event that the worker does not choose to take the money from the contract as salary.
2.15
The example calculation below shows the difference between the amount of tax and National Insurance which can be achieved if someone is on the payroll as opposed to be being paid through an arrangement where someone is working through a PSC where IR35 does not apply or has not been applied and all the profits (from that year) have been withdrawn in the most tax efficient manner. This example is based on 2010/11 tax rates.
Payment to PSC
120,000
Salary to Employee
120,000
Expenses
10,000
Expenses
N/A
Salary
0
Salary
120,000
PAYE
0
PAYE
37,928
Class 1 NIC primary
0
Class 1 NIC primary
4,960
Class 1 NIC Secondary
0
Class 1 NIC Secondary
14,629
Corporation Tax @ 21%
23,100
Corporation Tax
N/A
SA liability on dividends1
11,205
SA liability on dividends
N/A
Total Tax Paid
£34,305
Total Tax Paid
£57,516
The difference in payment to the Exchequer in this example is £23,211.
2.16
The Government believes that IR35 remains the correct approach to address this mismatch where intermediaries are used in circumstances which would otherwise be employment between the worker and the engaging organisation. This is why it took the decision to retain IR35 at Budget 2011. However, it recognised that IR35 can be difficult to
1 Calculation based on the person having no other income in the year so using a personal allowance of £6,475 and 10% relief for tax credits on UK dividends has been given.
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understand and it listened to the advice from the OTS that HMRC’s administration of IR35 should be improved.
2.17
Deciding whether the relationship between the worker and engager is one of employment relies on case law principles laid down by the Courts. This applies in IR35 and non-IR35 circumstances. The case law is reliant on the facts of each individual case and people working through PSCs have said that they often find it difficult to establish if IR35 would apply to them.
2.18
Over the last year, HMRC has worked with external stakeholders to simplify the guidance for IR35 to make it easier to understand, and has also developed ‘business entity’ tests and scenarios to demonstrate when and why IR35 applies. HMRC published the details of this work on their website on 9 May 2012. Alongside this new guidance HMRC has also made improvements to the way it polices IR35 including strengthening their specialist compliance teams and altering the way they approach investigations in this area.
Why isn’t the IR35 legislation enough for controlling persons and why does this consultation seek to go further?
2.19
When IR35 was introduced 10 years ago it was comparatively unusual for controlling persons of an engaging organisation to be working through a PSC. In the last few years anecdotal evidence suggests that it has become an increasingly common practice in both the private and public sectors.
2.20
The IR35 legislation places the obligation on the PSC to operate income tax and National Insurance in the relevant circumstances. This means that even where the appropriate tax and National Insurance for the circumstances of the case is being paid, that is not going to be clear and transparent to the engaging organisation. There is no reason it should be as the contract for the work has been made between the engaging organisation and the PSC under normal commercial practices.
2.21
The Government believes that, because of their role in an organisation, controlling persons should be required to meet their income tax and National Insurance obligations in a way which is transparent to their engager. This is not currently possible where they work through a PSC.
2.22
The Government has concluded that the most effective way to achieve the right level of transparency is for the engager to deduct income tax and National Insurance at source for payments they make to controlling persons in the same way as they do for their other employees and not to make payments direct to any PSC those controlling persons may work through for any other purposes. This requirement will provide the necessary assurances
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to the engaging organisation in a transparent way. It will also reduce the loss of the relevant tax and National Insurance to the Exchequer.
2.23
The Government recognises that, in the public sector, it is particularly important that off-payroll appointments are made to the highest possible standards. The Review of the tax arrangements of public sector appointees also considered this issue, and set out recommendations whereby government departments and their arm’s length bodies will also have the right to seek appropriate assurances about the tax arrangements of long-term specialist contractors.
2.24
The requirement would need to be underpinned by new legislation, more details of which are set out in the following section of this consultation document. The intention would be that HMRC would police the new provision through risk based employer compliance visits during which they would check that everyone who meets the definition of a ‘controlling person’ of that organisation was on the payroll.
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3. What is the Proposed Solution?
3.1
The Government is proposing to create in legislation a provision which would require the engaging organisation to place all controlling persons on the payroll. This provision would apply even where they might be working through a PSC for other purposes and even if the payments made by the engaging organisation were made to the PSC and not directly to the individual worker.
3.2
This would mean the whole amount paid by the engager to the PSC would be treated as remuneration of the controlling person as if they were an employee. The controlling person would have income tax and National Insurance deducted at source by the engaging organisation. This would effectively mean that the worker would be taxed in the same way as employees of the organisation.
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?
Q2 Does the proposed provision raise any commercial, employment or other issues that would need to be considered before any final conclusions are reached? If yes, please advise.
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?
How would the provision work?
3.3
This provision would take precedent over Chapters 7 and 8 ITEPA 2003 and all extra statutory provisions in the case of ‘controlling persons’ Only.
Q4 What are the consequences of this provision taking precedence over IR35 (Part 2 Chapter 8 ITEPA 2003) Part 2 Chapter 7 ITEPA 2003 and all extra statutory provisions?
3.4
This measure is intended to be targeted only at those who are able to influence the direction of the entity/organisation as controlling persons. We do not intend for this measure to stop genuine commercial arrangements.
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Q5 Are there any circumstances where this measure would prevent genuine commercial arrangements? If yes please explain.
3.5
This provision would place the responsibility of deducting the tax and National insurance payments on the engaging organisation as well as making them liable for the relevant employer’s National Insurance contributions. The IR35 legislation places this responsibility on the PSC. Placing the responsibility back onto the engaging organisation in the case of controlling persons removes some of the incentive for engaging organisations to encourage workers to be engaged through personal service companies as they will no longer make the National Insurance savings.
3.6
But it does not prevent anyone from working through a PSC; it just ensures that income from employment has the appropriate tax and National Insurance deducted and that the engager achieves the transparency of understanding which the Government considers to be important in these cases.
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4. Defining a Controlling Person
4.1
The Government proposes that a controlling person is defined as someone who is able to shape the direction of the organisation having authority or responsibility for directing or controlling the major activities of the engaging organisation during the year. This would be someone who has managerial control over a significant proportion of the organisation’s employees and/or control over a significant proportion of the budget of the organisation.
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’?
Q7 Should we extend controlling person to bring a larger group within the remit of this provision? If so who and why?
Q8 Should controlling person be narrowed so that fewer people are within its remit? If so who should be additionally excluded and why?
Who would we want to exclude
4.2
We want to exclude ‘micro businesses’ who engage controlling persons through a PSC from this provision. A micro business, is defined by the EU as a business which employs fewer than 10 persons and whose turnover and or balance sheet does not exceed €2million (approximately £1.7million.) This is because the burden on these micro businesses would be disproportionate and we would not want to discourage enterprise. This exclusion would not apply to micro businesses that are part of a group structure.
Q9 Is this exclusion a proportionate exception to the proposed provision?
Q10 Is there any reason we should not exclude micro businesses, who are not part of a group structure from this provision?
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5. Tax Impact Assessment
Summary of Impacts
2012-13
2013-14
2014-15
2015-16
2016-17
N/A
N/A
+/-
+/-
+/-
Exchequer impact (£m)
The Government will set out the Exchequer impact in due course. The final costing will be subject to scrutiny by the OBR.
Economic impact
This measure has no significant economic impacts.
Impact on individuals and households
This will have a negligible impact on a small number of individuals. All those this measure will affect are likely to be highly paid.
Equalities impacts
The proposal is expected to impact on highly paid individuals. No adverse impact on the equality of protected groups has been identified.
Impact on businesses and Civil Society Organisations
There will be a small reduction in administrative burden on micro businesses/PSC where the engaging organisation will take on the responsibility of paying PAYE and NICs. The increase in administrative burden for the engaging organisation will be negligible as all qualifying businesses will already be operating a payroll system and so the changes needed are expected to be minimal.
Impact on HMRC or other public sector delivery organisations
This will have minimal impact – the provision will be policed by HMRC as part of its normal risk profiling and employer compliance checking activities.
Other impacts
Micro businesses (defined by the EU as a business which employs fewer than 10 persons and whose turnover and/or balance sheet does not exceed 2 million Euros) are exempt from this provision.
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6. Summary of Consultation Questions
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?
Q2 Does the proposed provision raise any commercial, employment or other issues that would need to be considered before any final conclusions are reached? If yes, please advise.
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?
Q4 What are the consequences of this provision taking precedence over IR35 (Part 2 Chapter 8 ITEPA 2003) Part 2 Chapter 7 ITEPA 2003 and all extra statutory provisions?
Q5 Are there any circumstances where this measure would prevent genuine commercial arrangements? If yes please explain.
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’?
Q7 Should we extend controlling person to bring a larger group within the remit of this provision? If so who and why?
Q8 Should controlling person be narrowed so that fewer people are within its remit? If so who should be additionally excluded and why?
Q9 Is this exclusion a proportionate exception to the proposed provision?
Q10 Is there any reason we should not exclude micro businesses, who are not part of a group structure from this provision?
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7. The Consultation Process
This consultation is being conducted in line with the Tax Consultation Framework. There are 5 stages to tax policy development:
Stage 1 Setting out objectives and identifying options.
Stage 2 Determining the best option and developing a framework for implementation including detailed policy design.
Stage 3 Drafting legislation to effect the proposed change.
Stage 4 Implementing and monitoring the change.
Stage 5 Reviewing and evaluating the change.
This consultation is taking place during stage 2 of the process. The purpose of the consultation is to seek views on the detailed policy design and a framework for implementation of a specific proposal, rather than to seek views on alternative proposals.
How to respond
A summary of the questions in this consultation is included at chapter 6.
Responses should be sent by 16 August 2012, by e-mail to sarah.radford@hmrc.gsi.gov.uk or
by post to: Sarah Radford
1E/09
100 Parliament Street
London
SW1A 2BQ
Telephone enquiries 020 7147 2414 (from a text phone prefix this number with 18001)
Paper copies of this document or copies in Welsh and alternative formats (large print, audio and Braille) may be obtained free of charge from the above address. This document can also be accessed from the HMRC Internet site at http://www.hmrc.gov.uk/consultations/index.htm. All responses will be acknowledged, but it will not be possible to give substantive replies to individual representations.
When responding please say if you are a business, individual or representative body. In the case of representative bodies please provide information on the number and nature of people you represent.
Confidentiality
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Information provided in response to this consultation, including personal information, may be published or disclosed in accordance with the access to information regimes. These are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act 1998 (DPA) and the Environmental Information Regulations 2004.
If you want the information that you provide to be treated as confidential, please be aware that, under the FOIA, there is a statutory Code of Practice with which public authorities must comply and which deals with, amongst other things, obligations of confidence. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentially can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on HM Revenue and Customs (HMRC).
HMRC will process your personal data in accordance with the DPA and in the majority of circumstances this will mean that your personal data will not be disclosed to third parties.
The Consultation Code of Practice
This consultation is being conducted in accordance with the Code of Practice on Consultation. A copy of the Code of Practice criteria and a contact for any comments on the consultation process can be found in Annex A.
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Annex A: The Code of Practice on Consultation
About the consultation process
This consultation is being conducted in accordance with the Code of Practice on Consultation.
The consultation criteria
1. When to consult – Formal consultation should take place at a stage when there is scope to influence the policy outcome.
2. Duration of consultation exercises – Consultations should normally last for at least 12 weeks with consideration given to longer timescales where feasible and sensible.
3. Clarity of scope and impact – Consultation documents should be clear about the consultation process, what is being proposed, the scope to influence and the expected costs and benefits of the proposals.
4. Accessibility of consultation exercise – Consultation exercises should be designed to be accessible to, and clearly targeted at, those people the exercise is intended to reach.
5. The burden of consultation – Keeping the burden of consultation to a minimum is essential if consultations are to be effective and if consultees’ buy-in to the process is to be obtained.
6. Responsiveness of consultation exercises – Consultation responses should be analysed carefully and clear feedback should be provided to participants following the consultation.
7. Capacity to consult – Officials running consultations should seek guidance in how to run an effective consultation exercise and share what they have learned from the experience.
If you feel that this consultation does not satisfy these criteria, or if you have any complaints or comments about the process, please contact:
Amy Burgess, Consultation Coordinator, Budget & Finance Bill Co-ordination Group, HM Revenue & Customs, 100 Parliament Street, London, SWA 2BQ
e-mail hmrc-consultation.co-ordinator@hmrc.gsi.gov.uk
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Annex B: Relevant Government Legislation
Part 8 Chapter 2 ITEPA 2003
CHAPTER 8APPLICATION OF PROVISIONS TO WORKERS UNDER ARRANGEMENTS MADE BY INTERMEDIARIES
Application of this Chapter
48Scope of this Chapter
(1)This Chapter has effect with respect to the provision of services through an intermediary.
(2)Nothing in this Chapter—
(a)affects the operation of Chapter 7 of this Part, or
(b)applies to payments subject to deduction of tax under section 555 of ICTA (payments to non-resident entertainers and sportsmen).
49Engagements to which this Chapter applies
(1)This Chapter applies where—
(a)an individual (“the worker”) personally performs, or is under an obligation personally to perform, services for the purposes of a business carried on by another person (“the client”),
(b)the services are provided not under a contract directly between the client and the worker but under arrangements involving a third party (“the intermediary”), and
(c)the circumstances are such that, if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client.
(2)In subsection (1)(a) “business” includes any activity carried on—
(a)by a government or public or local authority (in the United Kingdom or elsewhere), or
(b)by a body corporate, unincorporated body or partnership.
(3)The reference in subsection (1)(b) to a “third party” includes a partnership or unincorporated body of which the worker is a member.
(4)The circumstances referred to in subsection (1)(c) include the terms on which the services are provided, having regard to the terms of the contracts forming part of the arrangements under which the services are provided.
(5)In this Chapter “engagement to which this Chapter applies” means any such provision of services as is mentioned in subsection (1).
50Worker treated as receiving earnings from employment
(1)If, in the case of an engagement to which this Chapter applies, in any tax year—
(a)the conditions specified in section 51, 52 or 53 are met in relation to the intermediary, and
(b)the worker, or an associate of the worker—
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(i)receives from the intermediary, directly or indirectly, a payment or benefit that is not employment income, or
(ii)has rights which entitle, or which in any circumstances would entitle, the worker or associate to receive from the intermediary, directly or indirectly, any such payment or benefit,
the intermediary is treated as making to the worker, and the worker is treated as receiving, in that year a payment which is to be treated as earnings from an employment (“the deemed employment payment”).
(2)A single payment is treated as made in respect of all engagements in relation to which the intermediary is treated as making a payment to the worker in the tax year.
(3)The deemed employment payment is treated as made at the end of the tax year, unless section 57 applies (earlier date of deemed payment in certain cases).
(4)In this Chapter “the relevant engagements”, in relation to a deemed employment payment, means the engagements mentioned in subsection (2).
51Conditions of liability where intermediary is a company
(1)Where the intermediary is a company the conditions are that the intermediary is not an associated company of the client that falls within subsection (2) and either—
(a)the worker has a material interest in the intermediary, or
(b)the payment or benefit mentioned in section 50(1)(b)—
(i)is received or receivable by the worker directly from the intermediary, and
(ii)can reasonably be taken to represent remuneration for services provided by the worker to the client.
(2)An associated company of the client falls within this subsection if it is such a company by reason of the intermediary and the client being under the control—
(a)of the worker, or
(b)of the worker and other persons.
(3)A worker is treated as having a material interest in a company if—
(a)the worker, alone or with one or more associates of the worker, or
(b)an associate of the worker, with or without other such associates,
has a material interest in the company.
(4)For this purpose a material interest means—
(a)beneficial ownership of, or the ability to control, directly or through the medium of other companies or by any other indirect means, more than 5% of the ordinary share capital of the company; or
(b)possession of, or entitlement to acquire, rights entitling the holder to receive more than 5% of any distributions that may be made by the company; or
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(c)where the company is a close company, possession of, or entitlement to acquire, rights that would in the event of the winding up of the company, or in any other circumstances, entitle the holder to receive more than 5% of the assets that would then be available for distribution among the participators.
(5)In subsection (4)(c) “participator” has the meaning given by section 417(1) of ICTA.
52Conditions of liability where intermediary is a partnership
(1)Where the intermediary is a partnership the conditions are as follows.
(2)In relation to any payment or benefit received or receivable by the worker as a member of the partnership the conditions are—
(a)that the worker, alone or with one or more relatives, is entitled to 60% or more of the profits of the partnership; or
(b)that most of the profits of the partnership concerned derive from the provision of services under engagements to which this Chapter applies—
(i)to a single client, or
(ii)to a single client together with associates of that client; or
(c)that under the profit sharing arrangements the income of any of the partners is based on the amount of income generated by that partner by the provision of services under engagements to which this Chapter applies.
In paragraph (a) “relative” means husband or wife, parent or child or remoter relation in the direct line, or brother or sister.
(3)In relation to any payment or benefit received or receivable by the worker otherwise than as a member of the partnership, the conditions are that the payment or benefit—
(a)is received or receivable by the worker directly from the intermediary, and
(b)can reasonably be taken to represent remuneration for services provided by the worker to the client.
53Conditions of liability where intermediary is an individual
Where the intermediary is an individual the conditions are that the payment or benefit—
(a)is received or receivable by the worker directly from the intermediary, and
(b)can reasonably be taken to represent remuneration for services provided by the worker to the client.
The deemed employment payment
54Calculation of deemed employment payment
(1)The amount of the deemed employment payment for a tax year (“the year”) is the amount resulting from the following steps—
Step 1
Find (applying section 55) the total amount of all payments and benefits received by the intermediary in the year in respect of the relevant engagements, and reduce that amount by 5%.
Step 2 21
Add (applying that section) the amount of any payments and benefits received by the worker in the year in respect of the relevant engagements, otherwise than from the intermediary, that—
(a)are not chargeable to income tax as employment income, and
(b)would be so chargeable if the worker were employed by the client.
Step 3
Deduct (applying Chapters 1 to 5 of Part 5) the amount of any expenses met in the year by the intermediary that would have been deductible from the taxable earnings from the employment if—
(a)the worker had been employed by the client, and
(b)the expenses had been met by the worker out of those earnings.
If the result at this or any later point is nil or a negative amount, there is no deemed employment payment.
Step 4
Deduct the amount of any capital allowances in respect of expenditure incurred by the intermediary that could have been deducted from employment income under section 262 of CAA 2001 (employments and offices) if the worker had been employed by the client and had incurred the expenditure.
Step 5
Deduct any contributions made in the year for the benefit of the worker by the intermediary to a scheme approved under Chapter 1 or 4 of Part 14 of ICTA that if made by an employer for the benefit of an employee would not be chargeable to income tax as income of the employee.
This does not apply to excess contributions made and later repaid.
Step 6
Deduct the amount of any employer’s national insurance contributions paid by the intermediary for the year in respect of the worker.
Step 7
Deduct the amount of any payments and benefits received in the year by the worker from the intermediary—
(a)in respect of which the worker is chargeable to income tax as employment income, and
(b)which do not represent items in respect of which a deduction was made under step 3.
Step 8
Assume that the result of step 7 represents an amount together with employer’s national insurance contributions on it, and deduct what (on that assumption) would be the amount of those contributions.
The result is the deemed employment payment.
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(2)If section 559 of ICTA applies (sub-contractors in the construction industry: payments to be made under deduction), the intermediary is treated for the purposes of step 1 of subsection (1) as receiving the amount that would have been received had no deduction been made under that section.
(3)In step 3 of subsection (1), the reference to expenses met by the intermediary includes—
(a)expenses met by the worker and reimbursed by the intermediary, and
(b)where the intermediary is a partnership and the worker is a member of the partnership, expenses met by the worker for and on behalf of the partnership.
(4)In step 3 of subsection (1), the expenses deductible include the amount of any mileage allowance relief for the year which the worker would have been entitled to in respect of the use of a vehicle falling within subsection (5) if—
(a)the worker had been employed by the client, and
(b)the vehicle had not been a company vehicle (within the meaning of Chapter 2 of Part 4).
(5)A vehicle falls within this subsection if—
(a)it is provided by the intermediary for the worker, or
(b)where the intermediary is a partnership and the worker is a member of the partnership, it is provided by the worker for the purposes of the business of the partnership.
(6)Where, on the assumptions mentioned in paragraphs (a) and (b) of step 3 of subsection (1), the deductibility of the expenses is determined under sections 337 to 342 (travel expenses), the duties performed under the relevant engagements are treated as duties of a continuous employment with the intermediary.
(7)In step 7 of subsection (1), the amounts deductible include any payments received in the year from the intermediary that—
(a)are exempt from income tax by virtue of section 229 or 233 (mileage allowance payments and passenger payments), and
(b)do not represent items in respect of which a deduction was made under step 3.
(8)For the purposes of subsection (1) any necessary apportionment is to be made on a just and reasonable basis of amounts received by the intermediary that are referable—
(a)to the services of more than one worker, or
(b)partly to the services of the worker and partly to other matters.
55Application of rules relating to earnings from employment
(1)The following provisions apply in relation to the calculation of the deemed employment payment.
(2)A “payment or benefit” means anything that, if received by an employee for performing the duties of an employment, would be earnings from the employment.
(3)The amount of a payment or benefit is taken to be—
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(a)in the case of a payment or cash benefit, the amount received, and
(b)in the case of a non-cash benefit, the cash equivalent of the benefit.
(4)The cash equivalent of a non-cash benefit is taken to be—
(a)the amount that would be earnings if the benefit were earnings from an employment, or
(b)in the case of living accommodation, whichever is the greater of that amount and the cash equivalent determined in accordance with section 398(2).
(5)A payment or benefit is treated as received—
(a)in the case of a payment or cash benefit, when payment is made of or on account of the payment or benefit;
(b)in the case of a non-cash benefit that is calculated by reference to a period within the tax year, at the end of that period;
(c)in the case of a non-cash benefit that is not so calculated, when it would have been treated as received for the purposes of Chapter 4 or 5 of this Part (see section 19 or 32) if—
(i)the worker had been an employee, and
(ii)the benefit had been provided by reason of the employment.
56Application of Income Tax Acts in relation to deemed employment
(1)The Income Tax Acts (in particular, the PAYE provisions) apply in relation to the deemed employment payment as follows.
(2)They apply as if—
(a)the worker were employed by the intermediary, and
(b)the relevant engagements were undertaken by the worker in the course of performing the duties of that employment.
(3)The deemed employment payment is treated in particular—
(a)as taxable earnings from the employment for the purpose of securing that any deductions under Chapters 2 to 6 of Part 5 do not exceed the deemed employment payment; and
(b)as taxable earnings from the employment for the purposes of section 232.
(4)The worker is not chargeable to tax in respect of the deemed employment payment if, or to the extent that, by reason of any combination of the factors mentioned in subsection (5), the worker would not be chargeable to tax if—
(a)the client employed the worker,
(b)the worker performed the services in the course of that employment, and
(c)the deemed employment payment were a payment by the client of earnings from that employment.
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(5)The factors are—
(a)the worker being resident, ordinarily resident or domiciled outside the United Kingdom,
(b)the client being resident or ordinarily resident outside the United Kingdom, and
(c)the services in question being provided outside the United Kingdom.
(6)Where the intermediary is a partnership or unincorporated association, the deemed employment payment is treated as received by the worker in the worker’s personal capacity and not as income of the partnership or association.
(7)Where—
(a)the worker is resident in the United Kingdom,
(b)the services in question are provided in the United Kingdom, and
(c)the client or employer carries on business in the United Kingdom,
the intermediary is treated as having a place of business in the United Kingdom, whether or not it in fact does so.
(8)The deemed employment payment is treated as relevant earnings of the worker for the purposes of section 644 of ICTA (relevant earnings for purposes of permissible pension contributions).
Supplementary provisions
57Earlier date of deemed employment payment in certain cases
(1)If in any tax year—
(a)a deemed employment payment is treated as made, and
(b)before the date on which the payment would be treated as made under section 50(2) any relevant event (as defined below) occurs in relation to the intermediary,
the deemed employment payment for that year is treated as having been made immediately before that event or, if there is more than one, immediately before the first of them.
(2)Where the intermediary is a company the following are relevant events—
(a)the company ceasing to trade;
(b)where the worker is a member of the company, the worker ceasing to be such a member;
(c)where the worker holds an office with the company, the worker ceasing to hold such an office;
(d)where the worker is employed by the company, the worker ceasing to be so employed.
(3)Where the intermediary is a partnership the following are relevant events—
(a)the dissolution of the partnership or the partnership ceasing to trade or a partner ceasing to act as such;
(b)where the worker is employed by the partnership, the worker ceasing to be so employed.
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(4)Where the intermediary is an individual and the worker is employed by the intermediary, it is a relevant event if the worker ceases to be so employed.
(5)The fact that the deemed employment payment is treated as made before the end of the tax year does not affect what receipts and other matters are taken into account in calculating its amount.
58Relief in case of distributions by intermediary
(1)A claim for relief may be made under this section where the intermediary—
(a)is a company,
(b)is treated as making a deemed employment payment in any tax year, and
(c)either in that tax year (whether before or after that payment is treated as made), or in a subsequent tax year, makes a distribution (a “relevant distribution”).
(2)A claim for relief under this section must be made—
(a)by the intermediary by notice to the Inland Revenue, and
(b)within 5 years after the 31st January following the tax year in which the distribution is made.
(3)If on a claim being made the Inland Revenue are satisfied that relief should be given in order to avoid a double charge to tax, they must direct the giving of such relief by way of amending any assessment, by discharge or repayment of tax, or otherwise, as appears to them appropriate.
(4)Relief under this section is given by setting the amount of the deemed employment payment against the relevant distribution so as to reduce the distribution.
(5)In the case of more than one relevant distribution, the Inland Revenue must exercise the power conferred by this section so as to secure that so far as practicable relief is given by setting the amount of a deemed employment payment—
(a)against relevant distributions of the same tax year before those of other years,
(b)against relevant distributions received by the worker before those received by another person, and
(c)against relevant distributions of earlier years before those of later years.
(6)Where the amount of a relevant distribution is reduced under this section, the amount of any associated tax credit is reduced accordingly.
59Provisions applicable to multiple intermediaries
(1)The provisions of this section apply where in the case of an engagement to which this Chapter applies the arrangements involve more than one relevant intermediary.
(2)All relevant intermediaries in relation to the engagement are jointly and severally liable, subject to subsection (3), to account for any amount required under the PAYE provisions to be deducted from a deemed employment payment treated as made by any of them—
(a)in respect of that engagement, or
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(b)in respect of that engagement together with other engagements.
(3)An intermediary is not so liable if it has not received any payment or benefit in respect of that engagement or any such other engagement as is mentioned in subsection (2)(b).
(4)Subsection (5) applies where a payment or benefit has been made or provided, directly or indirectly, from one relevant intermediary to another in respect of the engagement.
(5)In that case, the amount taken into account in relation to any intermediary in step 1 or step 2 of section 54(1) is reduced to such extent as is necessary to avoid double-counting having regard to the amount so taken into account in relation to any other intermediary.
(6)Except as provided by subsections (2) to (5), the provisions of this Chapter apply separately in relation to each relevant intermediary.
(7)In this section “relevant intermediary” means an intermediary in relation to which the conditions specified in section 51, 52 or 53 are met.
60Meaning of “associate”
(1)In this Chapter “associate”—
(a)in relation to an individual, has the meaning given by section 417(3) and (4) of ICTA, subject to the following provisions of this section;
(b)in relation to a company, means a person connected with the company; and
(c)in relation to a partnership, means any associate of a member of the partnership.
(2)Where an individual has an interest in shares or obligations of the company as a beneficiary of an employee benefit trust, the trustees are not regarded as associates of the individual by reason only of that interest except in the following circumstances.
(3)The exception is where—
(a)the individual, either alone or with any one or more associates of the individual, or
(b)any associate of the individual, with or without other such associates,
has at any time on or after 14th March 1989 been the beneficial owner of, or able (directly or through the medium of other companies or by any other indirect means) to control more than 5% of the ordinary share capital of the company.
(4)In subsection (3) “associate” does not include the trustees of an employee benefit trust as a result only of the individual’s having an interest in shares or obligations of the trust.
(5)Sections 549 to 554 (attribution of interests in companies to beneficiaries of employee benefit trusts) apply for the purposes of subsection (3) as they apply for the purposes of the provisions listed in section 549(2).
(6)In this section “employee benefit trust” has the meaning given by sections 550 and 551.
61Interpretation
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(1)In this Chapter—
“associate” has the meaning given by section 60;
“associated company” has the meaning given by section 416 of ICTA;
“business” means any trade, profession or vocation and includes a Schedule A business;
“company” means a body corporate or unincorporated association, and does not include a partnership;
“employer’s national insurance contributions” means secondary Class 1 or Class 1A national insurance contributions;
“engagement to which this Chapter applies” has the meaning given by section 49(5);
“national insurance contributions” means contributions under Part 1 of SSCBA 1992 or Part 1 of SSCB(NI)A 1992;
“PAYE provisions” means the provisions of Part 11 or PAYE regulations;
“the relevant engagements” has the meaning given by section 50(4).
(2)References in this Chapter to payments or benefits received or receivable from a partnership or unincorporated association include payments or benefits to which a person is or may be entitled in the person’s capacity as a member of the partnership or association.
(3)For the purposes of this Chapter—
(a)anything done by or in relation to an associate of an intermediary is treated as done by or in relation to the intermediary, and
(b)a payment or other benefit provided to a member of an individual’s family or household is treated as provided to the individual.
(4)For the purposes of this Chapter a man and a woman living together as husband and wife are treated as if they were married to each other.
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Discovery of earlier gross misconduct won’t undo a PILON (TLT LLP)
June 15, 2012Discovery of earlier gross misconduct won’t undo a PILON
Updated June 2012
Can an employer withhold a payment in lieu of notice if it uncovers earlier gross misconduct by the employee?
In the case of Cavenagh v William Evans Ltd, the Court of Appeal has held that an employer who exercised a contractual right to terminate an employee’s employment with a payment in lieu of notice (PILON) could not rely on the subsequent discovery of the employee’s earlier gross misconduct to avoid liability for the payment.
Background
Ever since the case of Boston Deep Sea Fishing v Ansell (1888), it has been clear that an employer who dismisses an employee wrongfully (and therefore faces a claim for damages for breach of contract) will successfully defend the claim if it subsequently uncovers evidence of earlier gross misconduct by the employee, even if it was unaware of the misconduct when it terminated the employee’s employment. The issue in this case was whether the same defence applies where the employer has failed to make a PILON in accordance with the terms of a contract of employment.
Facts
Cavenagh v William Evans Ltd
Mr Cavenagh was made redundant as part of restructuring at William Evans Ltd. In terminating his employment the company relied upon a contractual clause permitting it to make a payment in lieu of notice. Shortly afterwards, and before it had made the payment, the company discovered that Mr Cavenagh had transferred approximately £10,000 of company monies into his pension fund without authority some two months before termination. The company refused to make the payment in lieu of notice and Mr Cavenagh sued.
Decision
The Court of Appeal held that, in the absence of contractual provisions to the contrary, the company was not entitled to avoid the consequences of opting to exercise the PILON clause on discovery that a summary dismissal could have been justified.
The court distinguished this case from Boston Deep Sea Fishing by pointing out that the latter provided an employer with a defence against a claim for damages for wrongful dismissal, as opposed to Mr Cavenagh’s claim for payment of a contractually accrued debt.
Comment
If employers want to have a PILON clause in the contracts of their staff, they should consider including a provision enabling them to recover or avoid payments under the clause in the event that earlier misconduct by an employee comes to light which would have permitted summary dismissal.
Similarly, where a compromise agreement is used, employers should ensure that it is a condition of the agreement that the employee has not committed any act which would have allowed the employer to summarily terminate the employment contract.
This publication is intended for general guidance
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