Budget (3): IR35 consultation on deducting tax/NIC at source

The Government has signalled its intention to have tax and NICs deducted at source if someone is 'integral to the running of the organisation'.

In the supplementary documentation following the Budget speech, Section 2.207 said: Personal service companies and IR35

The Government will introduce a package of measures to tackle avoidance through the use of personal service companies and to make the IR35 legislation easier to understand for those who are genuinely in business. This will include:

• strengthening specialist compliance teams to tackle avoidance of employment income;
• simplifying the way IR35 is administered; and
• subject to consultation, requiring office holders/controlling persons who are integral to the running of an organisation to have PAYE and NICs deducted at source by the organisation by which they are engaged. (Finance Bill 2013).

The first two points are nothing new and both have been well trailed from the work of the Office of Tax Simplification's IR35 Forum.

However the third point:

subject to consultation, requiring office holders/controlling persons who are integral to the running of an organisation to have PAYE and NICs deducted at source by the organisation by which they are engaged. (Finance Bill 2013).

is something new - and often feared by contractors. Even a decade ago, there was concern when the idea of IR35 was first floated that it would fall upon the clients/agents to deduct tax and NIC.

Those fears were not realised - fortunately as some thought, at the time, that making clients responsible for IR35 tax collection could signal the death knell of freelancing. However, they have now resurfaced - albeit in a very vague form.

The key to this is the phrase 'integral to the running of an organisation' which could, as forecast on UKTECH, be the knee-jerk reaction to pour oil on the troubled waters of the senior Government workers, such as Ed Lester, head of the Student Loans Company, who was paid through his own limited company to avoid tax (according to reports).

The wording of this is far from clear and leads to a lot more questions than there are answers.

What is for sure is that any sentence which contains the words 'IR35' at the same time as 'PAYE and NICs deducted at source' is bound to send a shiver down the spines of many freelancers.

The measure is aimed at the Finance Bill 2013 so there are 12 months of consultation, during which the 'interested parties' should ensure that this sledge hammer targets the right nut.