The clampdown follows the revelation that senior public sector workers, including civil servants and high-profile BBC employees, form companies to minimise their tax liabilities.
Forming a company enables high-earning public sector workers to avoid paying National Insurance and to be taxed at the significantly lower corporation tax levels rather than personal tax levels.
The Government plans to introduce legislation in the next Budget to ensure that senior public sector staff, as well as some private sector consultants, have income tax (PAYE) and National Insurance deducted at source.
Nick Scull, senior tax partner at Garbutt & Elliott, who have offices at Monks Cross, York, has written to the Treasury warning of the danger of extending this legislation to SMEs in the private sector.
“We do understand public concern insofar as it relates to off-payroll appointments in the public sector. We see this as an issue of accountability,” said Mr Scull, pictured right.
“Clearly there are some practical issues in extending this to the wider group of public interest organisations, such as the BBC and local government. We therefore welcome the current proposals as a means to achieve the objectives as regards public interest organisations.”
But Mr Scull is concerned that some SMEs will be dragged into the legislative net, increasing red tape and damaging enterprise. Micro businesses – employing fewer than ten people – will be excluded but he believe that this exclusion should extend to the entire SME sector.
“There are thousands of SME businesses that are larger than micro businesses but still operate with very few directors who need to call in expertise from time to time over various significant parts of the business.
“In practice such experts are in our view unlikely to meet the proposed tests of having managerial control over a significant part of the business.
“Nonetheless, there is a possibility that that the proposed rules (if SMEs are not explicitly excluded) would create significant uncertainty for SMEs, given that most of them will not be willing to incur the cost of obtaining professional advice on the subject.”
As a result, a small business might not be willing to commission work from a personal service company (PSC) because they were worried it might incur a large tax bill.
“They might either manage without the additional expert support or access expert help only via larger companies that are PSCs. This could potentially be damaging to both the SME itself (not making what would have been a commercial decision to appoint a PSC) and to those offering their services via a PSC on a commercial basis.”
Nick Scull concluded: “We also believe that there is very little abuse of the tax rules in the SME sector. So by excluding all SMEs, not just micro-businesses as proposed, this should allow all bodies, in which there is a genuine public interest, to meet the intended goal of public accountability without the risk of damaging enterprise.”