Practices hit in Finance Bill

PROFESSIONAL SERVICE PRACTICES, including accountancy firms, have been hit harder than expected in this year’s Finance Bill as the government looks to crack down on disguised employment.

The government is determined to put a stop to the current rules, which allow junior employees to be classified as a partner for tax purposes, when in reality their job is unchanged and they hold no decision-making power, equity or capital risk.

Under the draft proposals, partners must satisfy one of three tests in order to maintain their status. The first option is ensuring at least a quarter of their pay is profit-dependent; the second would see them contribute at least 25% of their ‘fixed pay’ to the firm’s capital; or the third option is to prove they have significant influence on the overall partnership.

If partners are deemed to be employees then employer’s national insurance contributions at 13.8% will be due and other employment-related tax rules, such as benefits in kind and share scheme rules, will apply to them.

It is a harsher move than many practitioners were expecting, although there is an acceptance that it makes sense to set a clearer distinction between partners and employees. However, it could make a significant financial difference to junior partners, and there has already been criticism of the influence test, with some suggesting it is too subjective.

Other measures likely to be of interest to practitioners include the extension to real-time PAYE easements, which will see micro-employers given another two years’ grace from compliance with real-time PAYE reporting requirements.

The deadline for compliance with real-time PAYE reporting (RTI) will be April 2016 for businesses with fewer than ten employees. Those with up to 49 employees will have up to April 2014 – itself an existing easement – to send PAYE information about their employees in real time.

In a similar vein, the CIoT expressed relief HMRC has decided not to fundamentally reform the current regime on ‘close company’ loans, having held concerns small businesses may have again shouldered greater administrative burdens as a result of swingeing changes.

More minor points include the repeal of an Income Tax (Earnings and Pensions) Act (ITEPA) section which prevents a car benefit charge if the provision of a company car or van constitutes earnings from employment under any other provision. Additionally, legislation will be introduced to put “beyond doubt” that payments for private use of a company car or van need to be made in the tax year in which private use was undertaken. Both amendments will come in from 2014/15.

One point of pleasant surprise came with the news this year’s bill is 401 pages shorter than 2013’s edition, and in the context of tax simplification, there is the feeling among large sections of the sector that is no bad thing.

It is important to note this is the last year before the general election there will be time for a full Finance Bill, as although the drafts are published in December they don’t receive Royal Assent until the following July.