National Insurance Contributions Bill

Written evidence submitted by the Chartered Institute of Taxation (NI 03)

The Chartered Institute of Taxation

The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.

The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.

The CIOT’s 17,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.

1. Introducing a targeted Anti-Avoidance Rule for intermediaries (clause 5)

1.1 Clause 5 introduces a new TAAR into the Social Security (Categorisation of Earners) Regulations 1978 (SI 1978/1689) to ensure that workers who would be employees as a result of paragraph 2 of Schedule 1 (and paragraphs 2 and 9 of Schedule 3) of SI 1978/1689, but for the imposition of ‘artificially constructed intermediary arrangements’, are treated as employees for NICs purposes

1.2 The TAAR in Clause 5 is however more broadly based in that it extends beyond purely agency workers. It also applies to (i) employees employed by a foreign employer who are supplied to a host employer in Great Britain and (ii) cases where an individual provides their services further to a contract between an end client and a UK agency

1.3 Retrospective effect and vires

The TAAR has retrospective effect from 6 April 2014. However, despite this, the liability to secondary contributions only apples in relation to payments made after the Bill receives Royal Assent.

1.4 Given the retrospective effect we wonder whether it could have been introduced earlier by way of a statutory instrument under existing powers (at Sections 2 and 7 of the Social Security Contributions and Benefits Act (SSCBA) 1992). It may be that the government does not consider that it has the vires to do this as paragraphs (3)-(6) of Clause 5 make provisions for amending the Social Security (Contributions & Benefits) Act (SSCBA) 1992 (and its Northern Ireland equivalent) to include provision for the making of regulations in the future to prevent the avoidance of NICs in respect of arrangements designed to prevent regulations intended to designate who is an employed earner from applying as intended. But Sections 2(2)(b) and 7(2) of SSCBA 1992 are quite widely drawn in allowing for regulations to prescribe that an individual can be re-categorised or a person treated as secondary contributor, so we would have thought this would have included making provisions for anti-avoidance rules within these regulations.

1.5 In any event, we agree that the better approach is to broaden the primary NIC legislation to make specific provision for regulations to address situations where a TAAR may be appropriate in determining the status of earners, and who should be the secondary contributor for NIC purposes. This is what Clause 5 does, by virtue of Clause 5(3) and 5(4), and with equivalent provisions relating to Northern Ireland.

1.6 Commencement provisions

As noted above, the TAAR has retrospective effect from 6 April 2014, except for Regulation 5A(6)(b), which deals with foreign agencies and employers, which only has effect from Royal Assent of this Bill. It is not apparent why the secondary liability of foreign agencies and employers is carved out.

1.7 Also, the TAAR has force in respect of the secondary contributor for arrangements entered into on or after 6 April 2014 but only in respect of payments made on or after the passing of the Bill, in regard to foreign agencies and employers. So, the liability of secondary contributors, where there is a foreign agency or employer, is not retrospective but that of primary contributors is. Why is that?

1.8 The TAAR

The approach in Clause 5 is to focus on ‘the main purpose, or one of the main purposes’ of the arrangements that have been implemented in testing whether or not the TAAR should bite. In particular, whether those arrangements are seeking to circumvent the specific NIC measures recently introduced to tighten the rules dealing with agency workers and offshore employment intermediaries. We appreciate the rationale for this given that it is difficult for Government to keep up with constantly evolving arrangements which could mean that the specific NIC rules on agency workers and offshore employment intermediaries may become quickly outdated. However, at the same time there is always the problem of unintended consequences, particular where a TAAR is concerned and so we think it would also be helpful if HMRC published guidance (with examples) on how they would intend to apply the TAAR, particularly where arrangements are implemented for genuine commercial purposes as opposed to being driven by avoidance of NIC

1.9 Personal Service Companies (PSCs)

There is a particular area which we think may require some further consideration and that is where individuals work for their own personal service company (PSC).

1.10 HMRC have said that generally speaking the recently enacted specific income tax and NIC legislation relating to agency workers (in particular) is not intended to apply to PSCs.

1.11 For example, HMRC say that ‘in most cases the agency legislation has never applied, and will continue not to apply, to PSCs because the agency legislation does not apply where…the remuneration is not in consequence of the worker providing their services under the contract…[and] it will not apply in most cases where profits are withdrawn as dividends as this is a return on capital distribution, not remuneration in consequence of the worker providing their services’ (see HMRC’s Summary of Responses on Onshore Employment Intermediaries, 13 March 2014, paragraphs 3.55 and 3.56).

1.12 HMRC has also said that in so far as the TAAR is concerned then ‘people who set up PSCs for a reason other than reducing tax – such as the limited liability protections incorporation provides – would not be within the TAAR. However, HMRC would be able to use the TAAR in the most egregious cases where, for instance, an agency requires all of their workers to set up PSCs to avoid the new legislation. HMRC will continue to monitor activity in these areas’ (paragraph 3.69).

1.13 However, it strikes us that the potential difficulty here is that PSCs are typically established for a variety of reasons and that things are not generally so black and white. For example, an individual may decide to establish a PSC both because of the attractions of limited liability and because they may be able to reduce their tax and NICs bill at the same time.

1.14 We think it would be helpful if HMRC could set out its position on whether it is intended the TAAR should or should not apply to the PSC in these circumstances.

1.15 Other comments

No provision is made within the TAAR in respect of paragraphs (9)(e) and (f) of Schedule 3 of SI 1978/1689. It is unclear why this is the case.

October 2014

Prepared 22nd October 2014