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Lords tells HMRC to justify continuing existence of IR35
by Susie Hughes at 16:06 07/04/14 (News on IR35)
The House of Lords Select Committee, set up to review the use of Personal Services Companies (PSCs) has concluded that HM Revenue and Customs (HMRC) needs to do more to justify the continuing existence of the IR35 legislation.
HMRC has been told by the House of Lords Committee that it needs to do more to demonstrate that the revenue protection they claim for the IR35 legislation outweighs the costs it imposes.

The report concludes that there is a general lack of information of how widespread the use of PSCs is and that this is due in no small part to the absence of reliable information collected by HMRC.

The report also says that HMRC has failed to demonstrate that they have a sound basis for the £550m of tax that they cite as being at risk if IR35 were to be abolished or suspended.

There was criticism of the controversial Business Entity Tests, which were introduced via the IR235 Forum, a body of industry representative and civil servants who met under the auspices of the OPffice of Tax Simplification.

It also recommends the creation of an official Government guide laying out the differences between employment and self-employment.

However, there was also a proposal to make the personal service company question on the tax return - which has itself been subject to a fair amount of confusion - compulsory.

House of Lords - IR35 is complex
Echoing what the sector has been saying for more than a decade about the lack of clarity of the legislation, the Chairman of the Committee, Baroness Noakes, said: "During the inquiry, it became clear to us that there is an increasing use of personal service companies by freelancers and contractors, who are part of the UK's flexible workforce. There are many reasons for the use of personal service companies, including the possibility of reducing tax and national insurance bills. The Government’s anti-avoidance legislation, often referred to as IR35, is complex and raises its own problems.

"We found that there is a general lack of information of how widespread the use of personal service companies is in the UK economy and that this is due, in no small part, to the absence of reliable information collected by HMRC. This could be rectified by amending the personal tax return and employer year end declaration and making the questions on service companies compulsory, rather than optional.

"HMRC failed to demonstrate that they had a sound basis for the £550m of tax and national insurance that they cited as being at risk if IR35 were to be abolished or suspended. The deterrent nature of the IR35 legislation is its main rationale. We recommend that HMRC publish a detailed assessment of this figure and we also call for an assessment to be made of the cost to the taxpayers affected by the rules.

"Whilst we commend HMRC on the establishment of the IR35 Forum as a means of greater stakeholder engagement, we believe that HMRC should consult on revising the 'Business Entity Tests' and should make the Contract Review Service more effective."

Lower paid workers
The Committee also raised the issue of lower paid workers who might be forced into a form of self-employment by their employer/clients as a means of by-passing their employment rights or fincial obligations

Baroness Noakes said: "We also received evidence that low-paid workers may also be employed via personal service companies and that they may not be aware that this means they have fewer employment rights. We believe that this is something which needs to be thoroughly assessed by the Low Pay Commission. We also recommend that the Government produce a short guide setting out the basic differences between employment and self-employment; this would help to reduce some of the confusion experienced by those who are not in conventional employment situations.

"We also recommend that further measures are taken to build confidence in the public sector's management of off-payroll engagements and that the Treasury take a leading role in this."

Reactions - a general welcome
Various trade groups and industry representatives, many of whom had given evidence to the Committee, gave their views

FCSA - Compliance
The Freelancer and Contractor Services Association (FCSA) also contributed to the Committee's review and said that the report is 'a welcome reminder on the real value of the flexible workforce along with the desire to ensure true compliance is understood by all parties'.

FCSA said that it supported much of the recommendations tabled by the Committee especially those recognising the challenges faced by contractors and freelancers in navigating complex legislation. The group also echoed the Report’s view around the enforcement needed to ensure compliance is adhered to.

FCSA Chief Executive Julia Kermode said: “The report aligns closely to the views we hold and the need for compliance to be effectively adhered to across the whole industry. We firmly believe that transparent and detailed compliance standards are the true differentiators between best and poor practice. Anyone engaged in the flexible workforce industry should place active compliance at the highest level.

"We urge all stake holders in the recruitment industry to embrace compliance as an advantage for long term sustainability and not simply a nice to have”.

APSCo - good result
Sam Hurley Agency group APSCo’s Head of External Relations and Compliance, who gave evidence said: “This is a really good result and we welcome the recommendations made by the committee. During the enquiry I was asked to give evidence on the guidance provided by HMRC on IR35 and pointed out that we had very real concerns regarding the misuse of the Business Entity tests which were being utilised by some public sector departments to define an individual’s employment status for tax purposes.

“We therefore particularly welcome the call for the revision of the Business Entity Tests – an issue the IR35 Forum is currently looking at - and the recommendation that further measures should be taken to build confidence in the public sectors’ management of off payroll workers. Certainly our members would welcome a more consistent approach. We were also very pleased by the recommendation that HMRC should be tasked with publishing a more detailed assessment of their £550m at risk figure.

“One of the questions I was asked at the enquiry related to the effect of the Agency Workers’ Regulations and why this has caused an increase in the use of PSCs. I explained not only the very clear distinction between the highly skilled/highly paid contractor and the lower paid/lower skilled worker but also the fact that professional contractors – who are in business on their own account – neither want nor seek the employment related protections afforded by such legislation. We were extremely pleased therefore that the report acknowledged that while there has been an increase in the use of PSCs, that this was actually due to a number of different factors – including the growth of the flexible labour market - and that this isn’t necessarily a bad thing. This is a really refreshing view, given that the growth of PSCs is often talked about in pejorative rather than positive terms.

“Finally, although not relevant to the professional recruitment sector, we also welcome the suggestion that the use of PSCs for lower paid workers – who may not either understand the consequences – or be given a choice about such a decision – should be looked into more closely and that the Government should produce a short guide setting out the differences between employment and self-employment. We have indicated that APSCo would be more than willing to help the Government in producing such guidance either through the IR35 Forum or directly.”

Optionis - a timely boost for contractors
Optionis, home to professional employment provider Parasol and specialist contractor accountant ClearSky, has hailed the House of Lords report as a timely boost for contractors and freelancers.

Optionis chief executive Rob Crossland said: “As skilled, enterprising professionals who bring added value to businesses across the country, contractors and freelancers are the unsung heroes of the UK economy.

“It’s extremely refreshing to see some political support for contractors – as well as recognition of the challenges they can face when it comes to complying with complex legislation.

“The idea of a written guide to differentiate employment from self-employment is a common-sense step. However, it is unclear how such a guide would interact with the ‘supervision, direction or control’ test included in the onshore employment intermediaries legislation.

“Indeed, it is ironic that the Lords’ call for greater clarity comes just as the new false self-employment measures – a source of confusion and anxiety for Limited company contractors – come into force.”

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 report can be viewed here: Select Committee on Personal Service Companies - First Report - Personal Service Companies

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Susie Hughes © Shout99 2014

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