IR35 changes for directors and other office holders - any clearer ?

March 27, 2013 2013

hmrc ir35

As expected, new HMRC guidance was published yesterday around the tightening of IR35 for office holders to come into play on 6 April 2013, subject to the draft legislation being passed in Parliament.

The new guidance is in the form of two new FAQs on HMRC's website which can be found here and here.

Now, most of us know what HMRC are trying to achieve with these changes but for those of you not up to speed with this, basically they are looking to remove any possibility for Office Holders (e.g. Chief Execs, MDs, Finance Directors, Non Executive Directors etc) to avoid PAYE and NI deductions at source on their income from that Office or Directorship through the use of a third party, typically the director's own limited company. This has been possible up to now (although we have always maintained illegally) because IR35 and PAYE legislation has not perhaps been as clear as it could have been on this particular point and HMRC's guidance has been extremely poor and confusing.

Having read HMRC's new guidance in anticipation of the draft legislation being implemented a few times, we are not clear whether HMRC's guidance helps or hinders the understanding of the position from 6 April. Let's face it, the vast majority of non-tax people, including your typical employer, will look first at HMRC guidance before they consider legislation (if at all), and we are not sure that your average employer is going to fully understand the correct position, as HMRC has failed (yet again) to put things into plain English.

Our understanding of the position is that, as has always been the case, normal PAYE rules get first bite at the cherry as Office Holders fall under the same bracket as employees for tax purposes. If the employer fails to apply PAYE to the Office Holder's fees, e.g. because they think that the use of a third party in the middle gets round this, then IR35 rules will kick in to charge PAYE on the fees. This mirrors the current NI position which does not change.

Reading the responses to questions 3 and 4 of HMRC's FAQs, it is not difficult to go round in circles with this. This could just be us, but we suspect not. Why oh why could HMRC not have used this opportunity better to explain it properly and to clarify what this actually means in  practice, i.e. whether it is the end client, or the limited company in the middle, that has responsibility for deducting and paying over the PAYE and NI as this is the question most employers will be asking.

Maybe we're being unfair on HMRC at this stage as legislation has not even been implemented yet ? Maybe, just maybe, better guidance will be added in due course ??? In HMRC's defence, they have clarified that these changes do not apply to employees who are only directors by job title, i.e. they are not listed at Companies House as a legal director, nor does it apply to directors of Personal Service Companies other than where an Office of Employment is involved in another business which is something.

The proof will be in the pudding as they say. Undecided



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