Much publicity has recently been given to the fact that various senior figures in government departments are not in fact employed by the state, but rather provide their services through service companies, deriving various significant tax advantages from so doing. I have blogged before about the ironies of this situation, and we now see a Consultation Document on the subject of taxation of controlling persons that appears on the face of it more than a little incestuous.
Yesterday I blogged about IR35, which is the piece of legislation that one might have thought would have dealt with this situation, but is clearly regarded by the government and HMRC as inadequate to do so. As I said yesterday, IR35 is a particularly unsatisfactory and unsuccessful piece of legislation, but rather than improving it, or repealing it, the government is going to produce yet more legislation in this area. Simplification of the tax system, anyone?
It is clear from the foreword to the Document that my comment on the incestuous nature of the proposed legislation is justified, as this deals almost exclusively with public sector appointees, mentioning the private sector only as an afterthought in the final paragraph. One might have thought that a simple “don’t do it” instruction from the Prime Minister on the subject of civil servant using service companies might have sufficed, but clearly not.
I have no problem at all with the concept that someone who controls an organisation should be taxed as an employee of that organisation, but I do think that having further legislation alongside IR35 is excessive and over-complicated. The Document says that the reason for this is the need for transparency of the arrangements to the engager, which is not the case with IR35 because the application of that legislation is a matter between HMRC and the service company. But surely the best way to deal with this is to change the terms of IR35 so that the engager is aware of its application; we do not need a whole raft of new legislation to achieve this small change.
The key difference is that under IR35 tax & national insurance is applied by the service company, whereas the proposal is that under the new legislation it will be applied by the engager. However, I repeat that there is no reason why IR35 could not be applied on such a basis across the board, or indeed why the new legislation could not b applied on a service company deduction basis, and thus this still does not explain why we need two separate regimes.
Comfort for the public sector appears to be available in the form of a proposal to exclude businesses with fewer than 10 employees and a turnover / net assets of less than 2 million euros.
Complicating the tax system in order to solve a problem largely created by government itself is highly unsatisfactory, and I believe that the decision to do so is an indictment of the quality of drafting of IR35 as it currently exists, and of the ability of government to control the activities of its own departments. None of this puts the government in a very flattering light, and to be honest in my view there are many better ways it could be spending its time at present.