Wednesday, February 15, 2012

BLOG 121


It’s interesting to see that the head of the Student Loans Company (SLC), Ed Lester, is not employed by SLC but is loaned into SLC by his personal service company. Lots of people work for a personal services company that they own. Indeed the tax system recognises this. It contains specific provisions to ensure that the interposition of a personal service company between employer and employee does not avoid tax (except, perhaps to a minimal, acceptable extent). This is colloquially known as the IR35 legislation.

So why have the media made such a fuss about Mr Lester’s “tax avoidance device” (to quote The Guardian)? It is not a tax avoidance device at all; it simply shifts, with parliamentary approval, the obligation to apply PAYE from the SLC to the personal services company. Indeed it is actually probably in the public interest. Mr Lester (through his company) seems to have volunteered to pay the employer’s National Insurance contribution that SLC would otherwise have paid out of the money received from the SLC. Mr Lester has magnanimously donated this “tax”, to the nation.

I don’t know why the Guardian has got upset. I suspect probably because it does not understand IR35. However I think it was right to get upset but for the wrong reason. This is because it reports that, “HMRC has approved the arrangement”. I think it right that Margaret Hodge, Chairman of the Public Accounts Committee, is quoted as saying that the arrangement is “likely to be” examined by her Committee. Indeed, I would have much preferred her to pledge that it will examine it.

There is no statutory machinery for HMRC to “approve” such an arrangement. Furthermore, unless there is something very strange about Mr Lester’s relationship with SLC, I find it hard to understand how the IR35 legislation cannot apply. This legislation basically asks the question, “If Mr Lester had contracted direct with SLC and been paid direct by SLC, would he have been an employee of SLC?

To misquote an old saying, if something looks like an employment and quacks like an employment, it is probably an employment. If a person works subject to the control of a board and is an integral part of the line management of an organisation, that looks like an employment to me. Indeed, I would myself be hard put if I were asked to try to convince HMRC that it was not an employment.

So what should the PAC ask? Firstly it should ask whether HMRC did indeed “approve” Mr Lester’s arrangement and, if it did, why it did so. If The Guardian has got it wrong and HMRC did not approve it, it should ask whether HMRC intend to invoke IR35 against the arrangements and, if not, why it does not intend to do so?

It is vital that it asks these questions because HMRC from time to time takes cases before the Tribunals and the courts in situations where most disinterested observers would question why they have sought to enforce a law which is clearly unfair. HMRC’s stock response is that they have a duty to collect the tax that the law exacts. They have no power to introduce a concept of what is fair. Whilst I myself question whether this is right – as I think their general care and management power absolves them from collecting tax where to do so would be so unfair that other taxpayers might question the legitimacy of the tax system – I can understand their approach.

However it ceases to be understandable if HMRC adopt a policy that enforcement of tax is only for the little people; highly paid public servants need not pay the tax that the law requires.

I am even more concerned that The Guardian tells me that, “Lester who lives in Buckinghamshire, also receives £550 a week to pay for his travel and living expenses and cover his costs of getting to the company’s office in Glasgow”. That is fine if his personal services company puts it on his P11D and he puts it on his tax return and pays tax on it. But if not, I can see no circumstance in which, in accordance with the tax legislation, it is not taxable on him – or in which he, after discussion with his advisors, could realistically believe that it is not taxable on him.

I think it vital that the PAC investigates what has happened. It must do its job properly! If not, why should anyone have confidence that the tax system operates without fear or favour; that it applies equally to everyone?



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