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The Lords had taken evidence from many industry specialists, trade bodies and interested parties in the first detailed examination of IR35 and its impact on consumers.
The subsequent report from the Lords gave 16 recommendations, primarily set against a back drop that there was too little information available about the impact - good and bad - of IR35.
The Government has now responded. In broad brush terms, they are have paid lip-service to some points; acknowledged that reviews are already underway on others, and, in terms of actual action, said that they will look further at the administrative costs.
Here is a summary of the responses to the 16 recommendations.
Recommendation 1 - Accepted: That HMRC carry out and publish a detailed assessment of the current Exchequer protection figure and of the costs that taxpayers incur in dealing with IR35. This should enable a better assessment of whether the legislation is having the intended effect and is proportionate.
Response 1: HMRC will publish during autumn 2014 an updated administrative impact assessment note setting out the current administrative costs which taxpayers incur in dealing with IR35.
Recommendation 2 - On hold:Whilst we recognise the complexities in merging income tax and National Insurance and the effect that this may have on the contributory principle, we recommend that the Government re-examine the longer term case for combining taxes on income and National Insurance.
Response 2: The Government has looked at ways in which income tax and National Insurance could be more aligned. However, since employers are already adjusting to a significant number of reforms to payroll systems, the Government will wait for further progress on planned operational changes to the tax system before re-examining the operational integration of income tax and National Insurance.
Recommendation 3 - Accepted: That HMRC look again at whether they require complete and accurate responses to the "service company" questions on the personal tax return SA100 and the real time information employer year end declaration (formerly P35).
Response 3: Working with stakeholders, HMRC will undertake a full review of these questions on the personal tax return (SA100) and RTI end of year declaration: their form, purpose and clarity, with a view to making any necessary changes at the earliest practicable date.
Recommendation 4 - Accepted:
If HMRC decide that they need the information from those questions, we recommend that their completion should be made compulsory, backed up by the potential for penalties to be charged for incorrect answers or non-completion.
Response 4:See response to recommendation 3.
Recommendation 5 - Accepted: If HMRC retain the questions, we recommend that they revise the guidance notes accompanying the personal tax return SA100 and the real time information year end declaration by employers to make the relationship to IR35 clearer.
Response 5: HMRC will include in the review (referred to response to recommendation 30), the relevant guidance accompanying the returns.
Recommendation 6 - Accepted:
If HMRC decide that they do not need the information gained from the questions, we recommend that the questions be removed from the tax returns and declarations.
Response 6:See response to recommendation 3.
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That HMRC articulate with greater clarity the costs they incur from IR35 compliance efforts and administration, and the relationship between those costs and the overall yield gained from the legislation.
Response 7: The fact that HMRC has concentrated IR35 compliance work in specialist teams enabled HMRC to provide a very broad estimate of the cost of those teams. A more detailed administrative costing is not able to be provided because these compliance staff undertake some non-IR35 work and receive support for their IR35 work from staff outside of the teams, for example from technical specialists. The main purpose of IR35 is to deter people from disguising employment income through the use of intermediary arrangements. Accordingly, in HMRC’s view, the effectiveness of its compliance activity cannot be measured solely by a comparison of compliance costs (to the extent that those can be identified accurately) to any direct yield recovered.
Recommendation 8 - Already underway:
That the Contract Review Service be publicised to greater effect, that HMRC investigate ways to encourage individuals to use the service and that they look into ways to bolster confidence in its independence and impartiality.
Response 8: The IR35 Forum was set up in 2011/12 as part of a wider review by HMRC of the administration of IR35. Working with HMRC, the Forum is now looking at how the revised administration arrangements have worked and what further improvements can be made. That work includes a review of the Contract Review Service; its use and barriers to its use, and will report and make recommendations to the IR35 Forum during 2014. The Committee’s recommendations will be considered by HMRC as part of this review.
Recommendation 9 - Already underway:
That HMRC undertake a full consultation on how the Business Entity Tests could work better to provide greater certainty for taxpayers.
Response 9: A review of the Business Entity Tests forms one strand of the wider review of IR35 administration referred to at paragraph 2.46. HMRC is working on this strand with members of the IR35 Forum to gauge the use and impact of the Business Entity Tests and will report and make recommendations to the IR35 Forum during 2014.
Recommendation 10 - Noted:
That HMRC go to greater lengths to demonstrate that they are receptive to the feedback that is provided through this group (IR35 Fourm)and that they review the breadth of membership.
Response 10: HMRC is committed to working with the Forum, values the feedback the Forum provides, and will look for further ways to demonstrate it is receptive to this feedback. HMRC is also looking at membership of the IR35 Forum as part of the wider review of IR35 administration and will report and make recommendations to the IR35 Forum during 2014.
Recommendation 11 - Noted:
That the Government should develop and publish a short guide setting out the basic differences between employment and self-employment. The guidance should be published across multiple platforms, including both digital and paper, and should be made available to individuals working in all industries where intermediaries are prevalent.
Response 11: HMRC has recently updated its guidance on employment status, and provides an Employment Status Indicator tool, both of which are accessible online. Two factsheets are also available online.
HMRC will continue to work with the Department for Business, Innovation and Skills to review how worker awareness can be raised and cross-governmental guidance can be further enhanced, updated as part of the planned transition to gov.uk, and more widely disseminated.
Recommendation 12 - Noted:
That the Government includes within the remit of the Low Pay Commission a consideration of the use of personal service companies and umbrella companies by lower-paid workers, and the implications for pay, employment rights and statutory entitlements.
Response 12: The Low Pay Commission’s goal is to recommend levels for the minimum wage rates that will help as many low-paid workers as possible without adverse impact on their employment prospects. The remit of the Low Pay Commission for 2015 will be published over the summer of 2014.
Recommendation 13 - Noted:
As it is clear from the evidence that abuse of the expenses dispensations operated by umbrella companies is taking place, we recommend that HMRC ensure that enforcement action is taken to end these abuses and to ensure that expenses dispensations are managed correctly.
Response 13: A substantial number of temporary workers are now employed through umbrella companies. Many umbrella companies are compliant with their obligations but HMRC is aware that some are non-compliant, including through the misuse of dispensations issued by HMRC.
The circumstances in which HMRC is obliged to grant a dispensation are set out clearly in legislation: HMRC must grant a dispensation where it is satisfied that the expenses to be paid under that dispensation would qualify for tax relief. As part of the wider review of how HMRC can most effectively ensure compliance with employment taxes through the use of intermediaries, HMRC will consider how to tackle non-compliance by umbrella companies. This will include the misuse of dispensations.
Recommendation 14 - Part of another review:
That HMRC should review its processes for granting and renewing expenses dispensations, in order to ensure that potentially high risk organisations are granted dispensations only when appropriate.
Response 14: At Budget 2014 the Government announced that it would be consulting on the Office of Tax Simplification’s recommendation that the dispensations regime should be replaced with an exemption for qualifying business expenses to reduce the administrative burden on employers paying expenses and to give them a greater degree of flexibility. As part of that consultation, which is due to take place over the summer, the Government would like to better understand how any reform would affect particular industries, business models and types of organisations.
Recommendation 15 - Already happened:
That the Government carry out an assessment of the extent to which off-payroll engagements are used elsewhere in the public sector, including by those earning less than £58,200 per annum.
Response 15: The review went further in requiring that departments should determine whether it was appropriate to seek assurance from individuals earning less than £220 per day or who had been engaged for less than six months. Departments are free to take a risk-based approach to all such appointments, and are not required to seek assurance on those appointments they regard as low-risk. This is a proportionate and cost-effective way of managing this process.
Recommendation 16 - Already happened:
As the guidance embodied in Procurement Policy Note 07/12 currently appears to be applied inconsistently across departments, we recommend that HM Treasury take a leading role in ensuring consistency of application and that it should go to greater lengths to monitor the implementation of the Procurement Policy Note 07/12 guidance across Government departments.
Response 16 Cabinet Office and HM Treasury have published guidance on the assurance process and required departments to detail their implementation of these recommendations in their end of year accounts. HM Treasury released a review of compliance with these recommendations in March 2014.
More information
Shout99 has followed this subject closely and reported updates, reactions and analysis. For more information, see our News on IR35 Section. You can also subscribe to free email alerts when new items appear in this section, so you won't miss out on any important development.
The full PSC report from the House of Lords Select Committee can be viewed here: Select Committee on Personal Service Companies - First Report - Personal Service Companies
The Government's response can be read here: House of Lords Select Committee on Personal Service Companies - The Government’s response
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Susie Hughes © Shout99 2014
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