One of the hottest tax topics for a long time has been the consultation document published by HMRC on 23 May 2012 "The Taxation of Controlling Persons" relating to how the Government is proposing to stop senior employees avoiding PAYE and NI through the use of Personal Service Companies. This was hot on the wheels of, but not to be confused with, the paper "IR35: The Business Entity Tests" published on 9 May which we blogged about recently.

Now, there is nothing in these latest proposals on "Controlling Persons" that we weren't expecting but what is more worrying is what was NOT said in this paper particularly around the interaction with other, existing, legislation which we believe is causing a whole deal of confusion and uncertainty around the CURRENT position for employers which could have significant consequences.

Before we elaborate on what we mean, let's take a brief look at what is being proposed for "Controlling Persons".

Government's proposals on Controlling Persons

The main thrust of the proposals is that, where a worker has "the authority or responsibility to direct or control the activities of the engaging organisation", the engaging organisation would have to pay the worker through payroll as a regular employee under full deduction of PAYE and NI at source.

Some of the detail behind this include:

  • The requirement to pay the worker through payroll would apply irrespective of whether contractual or payment arrangements were with a third party, i.e. Personal Service Company. The new legislation would take precedence over IR35 in such cases.
  • The definition of directing or controlling the activities of the engaging organisation is "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".
  • Micro businesses will be excluded from the requirement to pay Controlling Persons through payroll. A Micro Business is defined as having less than 10 employees and annual turnover of less than about £1.7m.
  • The current consultation will close on 16 August 2012 with the expectation that legislation will be included within Finance Bill 2013.
  • HMRC will perform checks to ensure all Controlling Persons are included in the payroll of the engaging organisation as part of the normal risk-based Employer Compliance Reviews (aka PAYE audits).

Concerns regarding interaction with other tax legislation

Okay, in principle, these proposals could be considered to be relatively straight forward. Yes, there are still some unanswered questions, such as  What does a "significant proportion" mean in the context of defining a Controlling Person ? Or: Is the Government saying that blatant manipulation of the tax system will be accepted as long as the business qualifies as a Micro Business ? Or: What will happen in cases where there is uncertainty over whether the worker is a Controlling Person ? Or: What about someone like a Non Executive Director who has certain responsibilities but not on a day-today basis, will they be caught as a Controlling Person ? But, assuming that these questions are bottomed out during the process of "consultation", and become clear within the eventual legislation, then there should be minimal room for uncertainty. Or is this just wishful thinking perhaps ??

However, a bigger issue is how these new rules will interact with other employment tax legislation. Specifically, around Office Holders. At no point whatsoever is the term Office Holder or Officer of Employment referred to in the Government's consultation paper but we think this is a huge oversight as there is so much crossover with the current tax rules of Office Holders and the proposed Controlling Person rules that not to link the two is questionable at the very least. The current focus seems to be on Controlling Persons v IR35 but that is misguided we think.

There is no denying that the current rules on Office Holders are confusing (especially if you rely on HMRC's internal guidance which is severely contradictory in many places on this subject) and this has no doubt played a part in getting us to where we are today with this Controlled Persons paper.

BUT it should not be forgotten that under existing tax and NI legislation, income paid in respect of an Office of Employment automatically falls within the definition of employment income and must be subject to deductions at source like with any other employee. It is the engaging organisation's responsibility to make the appropriate deductions of PAYE and NI in such cases. Things get more complicated when a Personal Service Company is used by the Office Holder to be paid his fees but our view has always been that this falls outside the scope of IR35 in most cases and the Officer rules take precedence. We therefore think that the whole Controlling Persons consultation and the hoohah we have had of late of senior civil servants being paid "off-payroll" has missed the point that there is already existing legislation that SHOULD prevent PAYE and NI being avoided by many "Controlling Persons" without the need for anything other than more focus (and understanding of the rules !) by HMRC in stopping employers flouting the laws around this.

So, the questions and concerns we have around these new proposals and the position of Office Holders include:

  1. Will the Office rules become redundant once the Controlling Persons legislation comes in ?
  2. If yes, will the Controlling Persons legislation be wide enough to ensure equitable treatment across the board, specifically to include Directors and Non Executive Directors who are (or at least should be) PAYE'd as Office Holders under existing law ?
  3. If no, will there be clearer guidance and legislation as to how the Controlling Persons legislation interacts with Office Holders, i.e. which rules get first "dig" and whether IR35 will be in point for one group but not the other ?
  4. How will HMRC police non compliance with Office Holder rules up until the Controlling Persons legislation is enacted - or beyond if the two are to be kept separate ?



It is almost certain that new legislation will be introduced next year around Controlling Persons along the lines suggested in the Government's consultation paper. However, employers who assume they can "make hay while the sun shines" in paying senior employees outside of PAYE and NI until new legislation is in force should think again.

In our view, nothing has changed insofar as Office Holders are concerned. Most Office Holders are not covered by IR35 and, in the vast majority of cases, should have PAYE and NI deducted at source by the engaging business even where there is a Personal Service Company in the mix. Any business who ignores this in the lead up to any new legislation being introduced which may or may not supersede the Office Holder rules, could find themselves in breach of the PAYE regulations and all the cost and damage to reputation that that entails.

If you are unsure how this impacts your business, or whether you have a CURRENT risk, do get in touch with us.

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