A crackdown is being launched on a growing problem of tax avoidance through the use of personal service companies.
New legislation, currently progressing through the branches of Tynwald, will outlaw the practice and ensure anyone working through personal service companies pays tax in the same away as other employees.
It is thought there are just short of 100 people using such companies to reduce their tax liability but that number is growing.
The practice is currently legal but will be outlawed from April 1 next year, if the Income Tax (Amendment) Bill, due for its third reading in the House of Keys this week, is passed.
The amended Act will also introduce a new criminal offence of fraudulent tax evasion, putting income tax on a similar footing to both National Insurance and VAT and which could result in a jail term following conviction.
Treasury Minister Eddie Teare said it was all a question of fairness. He explained that a person earning £40,000 a year directly employed by a local company would pay £13,144 in National Insurance and ITIP but someone on the same salary using a personal service company could reduce their tax bill to just £636.
Mr Teare, who flagged up the change in his Budget this year, said: ‘Although the island’s income tax regime is favourable compared with other countries, there are still individuals who try to avoid or reduce their liabilities. I want to make sure that our tax system is fair and that all employees are treated the same whether or not they work through a company.’
In recent years there has been evidence of planning to delay payment of tax by individuals providing services to clients via companies owned by the individual, instead of directly as an employee. As the service is provided through a company, the payment for the service is made to the company. It is not considered to be remuneration of the individual and therefore not subject to ITIP.
Mr Teare said: ‘The change to the legislation will mean that if a client employs an individual it will not matter whether their services are provided through a company, trust or any other structure. The amount paid for their services will be treated as remuneration of the individual and subject to income tax with an ITIP deduction.’
Mr Teare said personal service companies were also used for National Insurance planning and he intended to introduce an order shortly to address that too.
Meanwhile, island-based businesses which employ staff working in the UK are being urged to make sure they are paying the correct National Insurance contributions.
The warning follows the conclusion of legal proceedings against a local firm found to owe £3.2 million in employer NI contributions, ultimately payable to HMRC in the UK. The case against Penfolds Limited centred on the Social Security reciprocal agreement with the UK.
In August 2008 HMRC informed the Manx government the company was not making the correct deductions of employer Class 1 National Insurance contributions.
Penfolds appealed against the decision but the appeal was dismissed in the Manx high court. The Privy Council refused leave to appeal.
Mr Teare said: ‘Using the Isle of Man system to try to avoid National Insurance payable under the reciprocal agreement is not acceptable.’
