The furore about the use of a personal service company to supply the services of the director of the Student Loan Company is appropriate.
It is virtually impossible to see how this man should not have been on PAYE at source: he was very clearly in a master /servant relationship under a contract for service and as such what was called Schedule E tax has to apply.
But it didn't. He is likely to have taken part in three tax avoidance activities:
a) He has transferred his income to a third party (the company) to save tax
b) He has probably recategorised the income as investment income (a dividend from the company) to save the tax due on employment
c) He may have deferred paying himself the income to delay paying tax.
The IR35 rules should have stopped this. They did not.
Graham Aaranson's general anti-avoidance principle won't go anywhere near it.
No normal employee would be allowed it.
Sp the real question is, why was a boss? Why was a special arrangement made for a person on high income unavailable to the rest? What is this bias towards abuse being seen yet again in HMRC towards those with wealth?
If HMRC did approve this then heads should roll, again. Not because it is a personal service company; they happen, but because this arrange should never have been approved.
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If Schedule E tax rules should apply then they should be applied, and this case would then be tax evasion and is criminal, whether or not a tax man said yeah OK. The individual tax man should also be ‘had up’ for aiding and abetting in the evasion
this is outrageous. people will be adivising their nannies to set up personal service companies next……….
on a serious note – this is outrageous. clearly his income was from employment and should have been taxed as such. god knows how he got this letter from HMRC? hartnett lunch?
Surely this misses the point.
There should be NO difference in tax due whether one is an employee or self employed.
Why should the tax rules lead to a lower taxation level for a self employed person?
If there are “allowances” available to self employed then morally they should also be available to employees.
Tax should be fair and treat all equally regardless of circumstances
I think there are differences between employment and self employment – and I’ve done both. Employees do not need allowances for expenses precisely because employers should meet them
That said I have argued for reform of small company tax for a long time – search Arctic Systems on the blog
Or search “David Milliband” for a more recent example 🙂
And just how many state “employees” are on a similar deal – check out local authority CEO/CFOs and also senior management in the NHS.
Many of these being paid via a service company are also recipients of pensions and contractual payoffs from other state units.
Public or private sector this should not happen
Richard
I’m surprised that no-one has mentioned another form of tax/employment abuse… which is all those low paid workers who have been categorised as ‘self-employed’ so that their employee can get off giving them employment rights, holiday pay or even sometimes paying the minimum wage. Delivery drivers, internet shopping packers, telesales, chuggers… none of these people are ‘self-employed’ in any meaningful sense, but companies just get away with it as there is just no enforcement.
The abuse happens at both ends, exploiting the poor, and featherbedding the wealthy.
Agreed, entirely
And then there’s the whole Isle of Man contractor abuse stuff…
But HMRC deny there’s any tax gap and so they turn a blind eye
If only they listended
ps
there are tens of thousands of locum doctors working for GP practices who are ‘self-employed’….my arse they are.
Actually, my arse that GPs are self employed is the right term
I did a quick calculation assuming the PSC charges SLC VAT (and it cannot reclaim the VAT?), and £28,000 is paid into a pension, and most of the rest is taken as a dividend. The PSC route means about £10,000 MORE tax is paid than the PAYE route. If IR35 applied then it would be more like £30,000 more tax than the PAYE route.
So the main benefit might be delaying taking the income until later years, but really only if he is not working in future years.
His second 2 year contract (with pension!) certainly looks IR35 caught. I wonder if he still gets paid when he is on holiday or off sick, and a big golden goodbye or redundancy when he is finished.
As John Rogers says, we shouldn’t have a tax system that charges more tax on earned income than investment income.
My understanding of the arrangement in this case is that the director of the Student Loan Company (let’s call him the smug fat cat for brevity) is accepted to be an employee of the SLC, no question. His income is therefore employment income and there is therefore no possibility of this being a contract for the provision of services between the smug fat cat’s personal service company (PSC) and the SLC. Therefore no VAT would be charged, as it is not a contract for services, and also IR35 could not apply for the same reason.
What I believe has happened is that the extra statutory concession A37 that applies where there is an arrangement for a company to appoint a director to the board of a employer company has been granted to the smug fat cat by HMRC. KPMG were involved in the negotiations. Under A37, the income of the smug fat cat is not treated as his employment income, but income of his PSC subject to corporation tax. This concession is usually applied for nominee director arrangements.
If this is right, the smug fat cat has been allowed, by HMRC, to benefit from an arrangement that is completely outside the intended scope of the concession and, I believe, is probably ultra vires HMRC.
What is likely to have happened is that the Treasury leaned on HMRC to approve this, probably on the cold economic logic that it would cost the SLC less than if the smug fat cat’s pay were to be increased to compensate for the cost of subjecting the smug fat cat to PAYE and NIC in which case the Treasury mandarin concerned should be demoted or sacked. I am prepared to believe that Danny Alexander was not aware of the detail, but David Willets is firmly in the frame.
We truly are approaching a Bastille moment if different laws are applied by Government to the rich from those that apply to everyone else. This is an occasion for everyone outside the sordid smelly corridors of power to be fizzing with anger.
The employer has no NI liability either, one of the reasons why employers often collude to change the employment status if they can get away with it
Thanks for this Roger. As you quite rightly say this would appear to be yet another example of one law for the rich and another for the rest of us.
Yoyr expression ‘Bastillle moment’ is wonderful.
‘Bastille moment’ may be wonderful but it is only rhetoric: the English temperament is different to the French one. Witness English travellers’ reaction to French protests, while the French government takes them pretty seriously, remembering the history.
Thanks for the clarification, Roger, it makes a bit more sense. But as you say, ESC A37 should never apply in these circumstances. The whole point is that it is a concession to avoid unnecessary paperwork where, for example, a director of a subsidiary is appointed by the parent company, and is paid under PAYE by the parent.
In any event it only applies to directors’ fees, and without looking at the Companies Act in detail, I would think there is a difference between the fees paid to a director to be on the Board, and his remuneration for executive responsibilities.
ESC’s are there as a concession and there are cases which determine that they cannot be used when the purpose is tax avoidance. How are those of us who are tax advisers, able to give advice when HMRC are reported to have wilfully ignored both the letter and spirit of the law?
Also see http://www.rossmartin.co.uk/index.php/sme-tax-news/35-sme-tax-news/822-top-civil-servants-in-tax-avoidance-scam
Oddly, I’ve been told by somone who was in a similar situation as Mr Lester (though for much smaller amounts and in the private/non-profit sector), that all fees paid to their company that they received for being a director of another company were subject to full PAYE income tax, employer NI and employee NI.
[…] Those wanting to know how HMRC approved the Student Loan Company deal should read this comment. […]
But A37 can only be used if Lester’s PSC is “not a company over which the director has control”?
if you’re ignoring rules why not make it a big ignorance (I like that use of the word)
Gary – it is only in the situation described in para 3 of A37 where “not a company over which the director has control” is mentioned as a condition.
In para 2 there is no mention of control:
2. It is also the practice of HMRC that, where a company has the right to appoint a director to the board of another company, by virtue of its shareholdings in, or a formal agreement with, the second company then, provided the director is required to hand over to the first company any fees or other earnings received in respect of his directorship with the second company and does so, and the first company is chargeable to corporation tax and agrees to accept liability on the fees, those fees are treated as income of the company and not of the director, and tax is not deducted from the fees under PAYE. Where the first company is chargeable not to corporation tax but to income tax (for example, if it is a non-resident company not trading through a branch or agency in the UK) and agrees to accept liability, tax is deducted at the basic rate of income tax from the fees.
It would be interesting to get hold of the formal agreement that must exist, which gives the PSC the right to appoint a member of the Board.
“The IR35 rules should have stopped this. They did not.”
How do we know that, though? As I understand it all that we know is that he was paid through a personal services company. He then has to self assess a liability under the IR35 rules on his Tax Return, which would then put him in the same position as if he were taxed at source. How do we know he hasn’t done that? Where is the proof that tax has been avoided in this way? There is no question of deferral as it is irrelevant whether dividends are paid out or not – all income earned in the tax year is taxable. The only advantage he admittedly obtains is a timing benefit as the tax need be paid by 19 April following the end of the tax year whereas an employee would suffer tax every month.
By the way, there is nothing at all unusual in the public sector employing people this way. In fact it is almost impossible to be a contractor in the public sector without using a PSC – you won’t get past the screening process if you’re not.
If he had applied PAYE I think we can be fairly sure he would have said so
After all it would have increased his tax bill
So shall we stop living in the land of make believe, yet again?
So you’re saying he broke the law by failing to make a correct self assessment? Have you seen his Return?
Presumably he completes a Return anyway given that he is a company director, almost certainly has investment income. There is a clear box at the bottom of page TR4 under the heading “Service companies” for this to go. Are you saying that in your opinion he didn’t fill it in?
The fact that no one appears to have mentioned the requirement to self assess says more about the media’s desire to get a sensational story without doing the requisite research, than it does about the likelihood of him having declared it on his Return or not in my opinion.
For example, when the story first broke I didn’t see a single reference to IR35. Journalists haven’t got a clue about these things, they just want a story. As you no doubt are aware.
Nothing I have said refers to his return
The question refers to whether tax should have been deducted at source – which should have been the case
It is you raising the straw man
Why?
…and just reading the Guardian article again proves my point. It asks why HMRC “sanctioned” the arrangement. But the arrangement is nothing to do with HMRC. There is absolutely no law prohibiting this sort of arrangement, indeed as I said before it is extremely commonplace for contractors in the public sector in particular. IR35 does not prohibit this arrangement, it just ignores the intermediary at the year end and says tax will be paid on anything not drawn out of the company by way of salary at that point. Lazy journalism.
The only thing HMRC can do is check whether he has put the deemed employment payment on his Return.
You are completely wrong
Schedule E applies
There is ample law banning such arrangements
No there is not. It is you who are completely wrong. Direct me to statute or case law where such arrangements are outlawed.
Schedule E (as was) charging provisions
PAYE regs