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Lords PSC (2): Head of OTS admits IR35 was 'innately clumsy'
by Susie Hughes at 13:58 18/12/13 (Political News)
The latest expert to appear before the House of Lords Select Committee on Personal Service Companies (PSCs) was John Whiting, the director of the Office of Tax Simplification (OTS). Although by the end of his evidence, even the Chairman admitted that there never seemed to be as much 'simplification' as one would like.
Mr Whiting, a respected accountant, has been involved with IR35 since its earliest days, recalling a 'fraught and tempestuous' first meeting on the subject in 1999. He was therefore quite keen to take on the position at OTS and admitted that while he did not have great hopes of solving IR35 completely, he thought there had been good progress.

He admitted the flaws in the original design of IR35, describing the approach of contract by contract as 'innately clumsy', and said that he never thought IR35 was designed to be used or policed, and that it was meant to act as a deterrent.

An early and important part of the work of the OTS was the establishment of the IR35 Forum, an advisory body comprising of HMRC officials, trade bodies and industry and technical experts in the field.

Mr Whiting's evidence is part of a fact-finding and research project by the House of Lords. The first people to give evidence earlier int he week had been senior civil servants from HM Revenue and Customs.

The first question to Mr Whiting followed the theme of the HMRC questions by trying to identify on 'how big an issue this was'.

Mr Whiting confirmed that numbers of PSCs have gone up, but precise figures were difficult to identify, but that data from Government and Companies House suggest that there are 600,000 or so companies with a single director and a single shareholder, but that a good number of them are dormant, so HMRC’s estimate of 200,000 seemed plausible. He accepted this figure would rise and spoke of the 'pull' and 'push' effects where, on the one hand, freelancers want to work with this flexible arrangement, but on the other hand, some are 'pushed' into working through their own company, which HMRC tried to tackle through IR35 and later throught the Managed Service Companies (MSC) legislation.

Administration of IR35
One of the first recommendations from the members of the IR35 Forum was the future of IR35. At the time, its members, including freelancer trade group, the PCG, came in for considerable criticism for not calling for its outright abolition. As a result, IR35 was retained with the intention that HMRC would improve its guidance and administration. The Committee wanted to delve deeper into this.

There were basically three recommendations: suspension pending a wider review; improved administration; and introduction of a business entity test. Mr Whiting revealed that there was a marginal preference for suspension, but recognised the risks of abuse of a suspension period. He was personally 'keen' on the business entity tests; but the feeling was that they were 'quite happy' with keeping IR35 and improving some of the administration.

Given that the improved administration option was chosen, the questioning came back to how well known and understood IR35 is among the people it applies to. Mr Whiting said: "Yes, to the extent that IR35 is a term that is so bandied about that people are well aware of its existence. I make two caveats to that. One is whether people really know and understand the detail. In other words, do they know only that there is a beast out there that is big and grey but they cannot actually define whether it is an elephant or a rhinoceros? That is perhaps one of the issues, and in some cases it is quite difficult to get at the detail."

Following on from HMRC's theme when two of its senior officials gave evidence recently, Mr Whiting recognised the need for more information about IR35 and also trailed the idea of having alerts from Companies House, and running campaign through trade bodies and industry sectors.

Clumsy
It has long been thought that IR35 was as much about deterrent as it was about enforcement, and that theme was discussed at the Select Committee. It was also recognised that tax legislation should be about to be administered with a 'light touch' and that the initial IR35 were, as Mr Whiting described 'innately clumsy'.

He also questioned whether IR35 was ever really intended to be enforced and was more designed for the deterrent side of the equation.

Mr Whting said: "What IR35 was trying to do was twofold. It was a deterrent against tax-saving, but it was also trying to recognise that some people were being forced off the payroll and were losing their employment rights and their right to benefits. I have always felt that IR35 was never actually designed to be used, in the sense of really being applied. In many ways the intention was that people would recognise that they were caught and say, “Okay, it’s a fair cop; I will go back on the payroll”, but that rather missed the point — we are back to my push and pull — that people were often being pushed off the payroll. My point is that when IR35 was designed in 1999-2000, to me the way in which it was going to be applied and policed was not really thought through because it was rather expected that the deterrent, to come back to your term, would be sufficient; everyone would be back on the payroll and, frankly, we would not be sitting here."

Benefit
There has been little evidence of the detailed financial benefit of IR35 to the Exchequer. Mr Whiting conceded that the amounts known, were relatively 'derisory - under £10 million - but the unquantifiable deterrent effect was significant.

There was considerable discussion about the real cost and potential benefit in terms of administration for HMRC and the small companies.

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Susie Hughes © Shout99 2013

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