Writing this blog just occasionally requires me to distasteful things. This morning, for instance, I innocently popped in to our office’s local newsagent after my walk to work to buy a Diet Coke (purely for rehydration purposes) and spotted a tax-related headline on the front page of the Daily Mail. Such is my devotion to my subject that I subverted the principles of a lifetime and bought it.
What caught my eye was a typically downbeat tabloid headline:
“BBC tells stars to dodge tax”
Well how was I supposed to resist that?
Long-term readers of Private Eye will know that Lord Birt, former director general of the BBC, used to operate through a personal service company as a tax planning measure. It clearly caught on, according to the Mail’s story, which reveals that it has become common practice at the BBC to ask staff to set up personal service companies (“PSCs”) or be sacked, with the result that over 3,000 BBC presenters and other workers are now engaged on this basis.
The tax savings for individuals from such arrangements are only likely to be significant in cases where the owner of the PSC can afford to leave significant profits undrawn within the company , which would presumably tend to apply to the better off among those involved, typically high profile presenters (Jeremy Paxman and Fiona Bruce are mentioned in the Mail’s story). The arrangement will however save large amounts of employer’s national insurance for the BBC.
This story gives rise to three main questions in my mind:
- Where on the continuum of tax avoidance schemes from centre ground to abusive does this lie?
- What anti-avoidance legislation, existing or proposed, might be brought into play to combat it?
- To what extent are limited HMRC resources preventing the application of existing anti-avoidance legislation?
Putting personal service company planning in context
It is common for employers to explore the possibility of engaging workers on a self-employed basis, principally due to national insurance savings, but also because of potential savings in pension contributions, sick pay, maternity pay, paid holidays and the removal of the risk of being taken to an employment tribunal. Not surprisingly, there is a lot of case law surrounding the issue of employed versus self-employed status, some of it tax-related, but the majority relating to employment law issues. This is an important factor, because any changes to the tax definition of employed status have to be made with reference to the employment law position also.
Whether a working relationship is an employment or a self-employment is a question of fact. A written contract will be the basis for HMRC consideration of employment status, but only if it is consistent with the actual working arrangements. Otherwise those arrangements will be considered by HMRC with a view to forming an overall opinion of the status of the engagement as an employment or a self-employment.
The key issues in this respect include the following:
- Substitution. If there is genuine provision for the worker to provide and pay a substitute to perform his or her contractual duties, there is no requirement for personal service, and thus under employment law there can be no employment.
- Mutual obligations, to provide and to accept work. Again, if these genuinely do not exist, the relationship is not an employment.
- Control. It would not be expected that a self-employed person would be subject to a high degree of control from their engager.
- Responsibility to correct defective work. This would be expected to fall on the self-employed person.
The use of personal service companies arose primarily in situations where working relationships had difficulty meeting the criteria for self-employed status. In response to this the Labour government introduced ‘IR35’ in 1999, being legislation to permit HMRC to ‘look through’ personal service companies for tax purposes where, ignoring the PSCs existence, the underlying relationship between engager and PSC owner was an employment relationship.
There was a great deal of speculation at the time IR35 was introduced that is was aimed primarily, or possibly solely, at the software industry, where the use of contractors was particularly widespread. Certainly its application by HMRC has been patchy, and not marked by particularly high levels of success before the Tax Tribunal and courts.
My approach to issues of employment v self-employment tends to be very direct and to the point. I ask my client if they require the personal service of the worker they are engaging. If they do, I tell them that the worker is an employee, on the basis that they will accept the services of that individual and no other. If they are prepared to accept a substitute, no doubt appropriately qualified, skilled and experienced, then we enshrine that in the contract for services between the parties, which is therefore a self-employed contract, or a contract to which IR35 has no application.
Placing this on the continuum of ‘centre ground of tax planning’ to ‘abusive tax avoidance’ is therefore quite an interesting exercise. Approached on my basis I see it as definitely centre ground, as the arrangements are in accordance with employment law and tax law, and do not rely on any oddities of that legislation in order to be effective. If people use PSCs in circumstances to which IR35 ought to apply (which I will come to below) then HMRC should apply it; after all tax legislation is there to be used, not to be ignored.
Whether it is abusive to identify and act on the fact that HMRC appears to be reluctant or under-resourced to apply particular tax legislation is an interesting question; personally I would regard it as very dangerous tax planning, a view which I suspect our professional indemnity insurers would share. “This doesn’t stack up technically but HMRC won’t do anything about it” does not impress me as sound justification for a piece of tax planning. That does not make it abusive to my mind, it just makes it very risky and technically unsound.
Without being an expert on the workings of a broadcasting organisation, it does seem to me that many of the arrangements being discussed by the Daily Mail must fail the key substitution test; it is difficult to imagine the BBC accepting Jeremy Paxman sending along a substitute to present Newsnight one evening. Thus if personal service is required, the use of a PSC should be extremely vulnerable to the application of IR35, in which case it is up to HMRC to apply it in appropriate cases.
It follows that the new General Anti-Abuse Rule would not be relevant in this case, as there is existing legislation available to deal with the problem.
So why would HMRC look this particular set of gift horses in the mouth? The only answer must be lack of resources. Having said that there is a greater focus on PSC issues at present, so perhaps this unsatisfactory situation is about to change. Certainly PSCs have become unacceptable in government service, so perhaps the net will now be flung wider in this respect, although that does not make it clearer why this has not been the case in the past. In summary, I repeat what I have said before; of all the possible false economies a government can make, emasculating the collector of tax revenues must be number one. Please, give HMRC the resources it needs to do its job properly and collect all of the tax it should be collecting, otherwise the entire tax system will be brought into the sort of disrepute previously ‘enjoyed’ only by politicians.