•From 6 April 2013, “office holders” will automatically be brought within the IR35 legislation for tax, as well as for NIC.
•But the meaning of “office holder” is open to question.
Finance Bill 2013 has introduced a new way for HMRC to bring companies within the scope of its dreaded “IR35” legislation: where the individual or the individual’s company “holds an office” in the client company. But there is some uncertainty as to who or what is an “office holder”.
Background to IR35 – on its way out...
The legislation behind IR35 has been around for over a decade. One might think that this would be sufficient time for it to ‘bed down’. Until fairly recently, many commentators were arguing that it had yielded very little by way of results for HM Revenue & Customs (HMRC), to the point that there were calls for it to be scrapped completely. In 2010 the coalition government said it intended to replace it, and in 2011 the Office of Tax Simplification said it should be suspended. HMRC resisted those calls, perceiving that IR35 served as a deterrent and that without it, there was a risk it would lose out on significant amounts of income tax and National Insurance contributions.
...then on its way back!
Then the news broke that the Chief Executive of the Student Loans Company was reportedly saving thousands of pounds in tax by arranging to be paid through his own company, rather than be paid personally. This was soon followed by similar stories in relation to senior posts throughout the civil service and the BBC. The government was stung into action by the public outcry that followed and, rather than wind IR35 down, it seems that the mood of the government instead swung in the opposite direction, to bolster the legislation. Initially there were proposals to apply PAYE to individuals who were working through companies but were “controlling persons” – broadly those with executive/strategic authority in the client company. These proposals were quickly shelved in favour of updated IR35 legislation attacking income to “office holders”. But what effect will this have on ordinary businesses?
How IR35 works
Simply put, the legislation, as introduced by the IR35 press releases back in 1999, attacks arrangements whereby an individual creates his or her own company (or partnership) and contracts to another business through that ‘intermediary’ company, rather than directly as an employee. The legislation looks to the relationship between the hiring business and the individual providing the services, and asks if that would be a contract of employment, ignoring the intermediary company. If so, the IR35 legislation requires the intermediary company to account for PAYE tax and NICs broadly equivalent to what would have been applied in a direct employment arrangement.
If the individual contractor has already applied PAYE and NICs to the income drawn from his or her intermediary company, no more is levied; the IR35 charge effectively bites if the individual has instead taken dividends (which would otherwise be much more tax/NI-efficient), or simply taken less salary overall.
If the engagement is more akin to self-employment then IR35 can be set aside. Having concurrent contracts with multiple businesses is often indicative of “self-employment” (so no IR35) but contractors should beware that HMRC tests for IR35 against each client engagement, rather than holistically across a company. This means that a company (or partnership) can be part in, and part out, of IR35
IR35 now catches “Office Holders”
Thanks to Finance Bill 2013, “office holders” are specifically caught within the updated IR35 legislation with effect from April 2013. This applies whether it is the individual’s intermediary company which formally holds the office in the client company, or the individual himself.
An office holder was not considered to be an employee in general terms, so merely ‘holding an office’ in the client company didn’t bring the engagement within the scope of IR35 for tax purposes until this amendment was introduced – although HMRC reckons office holders have always been caught for National Insurance purposes since income from an ‘office’ was always considered to count as earnings for NICs.
But what is an “Office Holder”?
HMRC’s explanatory notes, issued in the wake of the Finance Bill, describe an “office” as including “in particular any position which has an existence independent of the person who holds it and may be filled by successive holders. It is based on guidelines derived from case law... ...An office is a separate and independent position to which duties are attached; an office does not owe its existence to the incumbent or the discretion of an organisation.” So the position of director or company secretary qualifies.
HMRC’s own guidance on the “holder of an office” in its Employment Status Manual ESM2502 refers in more detail to the underlying case law (www.hmrc.gov.uk/manuals/esmmanual/ESM2502.htm), and ESM2503 states, “An office may be created by a charter, statute, or other document which is, or forms part of, the constitution of an organisation or which governs its operation.” It then goes on to list several examples of “office holders” – aside from directors and company secretaries, they tend to be positions with a civic role.
It may well be indicative that so many of the examples of potential "office holders" given in HMRC's manuals – sub-postmasters, coroners, club secretaries, etc. – have that public aspect to them. The Finance Bill Explanatory Note borrows heavily from the Employment Status Manuals – but even then HMRC admits that the definition is “not exhaustive”.
The guidance also sets out HMRC’s opinion that posts like "office manager" or "head of division" are not "offices" because they exist for only so long as the organisation wishes (likewise HMRC states that the new rules will not apply where a company engages a firm of accountants as auditors – unless a particular individual’s services are required).
Having said that, posts such as directors and company secretaries are without doubt offices, and a company can appoint (and broadly dismiss) directors as and when it sees fit. But the post of director is arguably similar from a legal perspective, from one company to the next, which might not so easily be said of "head of division".
It seems that for the most part, the inclusion of "office holder" within the scope of IR35 should not be cause for concern. There are probably few individuals who contract through an intermediary company to fulfil the post of director or company secretary to a client business. However, it also seems clear that, where the individual or his intermediary company takes on such a formal role, then IR35 may well now be in point. And there may be government or similar appointments (such as coroner) where this may now also apply.
Individuals working through companies with government contracts in particular should review their appointment to see if they now fall within the scope of "office holder". This certainly seems to be the area on which HMRC intends to concentrate, with reports that HMRC's capacity for IR35 reviews will number in the thousands over the next few years, and that much of this work is to focus on government and BBC posts.
Practical Tip :
Most contractors are unlikely to be affected by the new "office holder" rules but this does not mean that they are not caught by the already widely-drawn rules for IR35.
In fact it’s worth bearing in mind that some engagements may potentially be caught under the general employment rules, rather than IR35 in particular.