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Where these and other conditions are met, payments made by the client to the intermediary not covered by any actual payments or other benefits paid over as employment income (and so taxable as general earnings under ITEPA), to the worker by the end of the year or certain prior event such as dismissal, are treated as deemed employment payments of the worker.67 The rules for NICs are set out in regulations made under powers in the Welfare Reform and Pensions Act 1999. |
These rules have been one of the most contentious items in recent tax legislation. Its target is the abuse of an intermediary personal service company (PSC). The sort of PSC that worried the government was that in which a person, E, who had been an employee of X Ltd left X’s employment and then returned to provide more or less the same services as before but as the employee of PSC with which X Ltd made a contract for services. The worry was that the fee paid by X Ltd to PSC would not attract PAYE or National Insurance Contributions. A payment by PSC to E would of course attract both these liabilities but what tended to happen was that PSC would simply pay E enough schedule E income to make sure that the year would count as a contribution year for E’s NICs and then pay the balance as dividend.68 |
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When the government moved to counter the use of PSCs it found itself up against three problems. The first related to the central test in element (3) above which made these new rules apply, ie when, but for the PSC, the work would have been done under a contract of employment. This is a very uncertain and difficult area of law. The second difficulty was to decide who should be responsible for the PAYE and NICs—the original proposal would have put that burden on X, the client, but the final version chose the PSC instead. The third difficulty was that the government found itself up against not only pilots working for airlines but also a substantial sector of the computer consultancy industry, a sector with a strong North American element and so quite capable of speaking loudly. |
Where the three tests are satisfied, the contracts between the PSC and X are described as ‘relevant engagements’.69 The rules70 treat all payments made by X to the PSC as deemed schedule E payments—and so |