The report said that HM Revenue and Customs (HMRC) needs to do more to demonstrate that the revenue protection they claim for the ‘IR35’ legislation outweighs the costs it imposes. (See: Lords tells HMRC to justify continuing existence of IR35 - Shout99, Apr 2014)
In the report, the Committee said that HMRC has failed to demonstrate that they have a sound basis for the £550m of tax and national insurance IR35 saves through acting as a deterrent. This is despite the fact that the claimed deterrent nature of the IR35 legislation is its main rationale.
Chris Bryce, CEO of PCG said: “The conclusion of the Committee is that abolition or suspension of the IR35 legislation, whilst attractive, would be unwise if HMRC can prove it provides Exchequer protection to the tune of £550million.
“The simple fact is, HMRC cannot do so. PCG has repeatedly asked HMRC to justify the £550m figure and the so-called 'deterrent effect’ but HMRC has been unable or unwilling to do so. It is now clear from the findings of the House of Lords Select Committee that the effectiveness of this legislation and the justification for its continued existence is built on smoke and mirrors.
"We are calling for IR35 to be suspended while proper consideration is given to its abolition. Removing this unnecessary legislation will allow the UK’s flexible workforce to do what they do best – boost British business. The Government has refused to listen to the cries for help from the hundreds of thousands of contractors, freelancers and independent professionals blighted by IR35, but they cannot ignore the findings of the Committee."
Key Findings of the Report
The PCG described the report as 'an overwhelmingly positive contribution to the debate that has raged around IR35 ever since was first introduced some 15 years ago. The report contains a thorough analysis of the tax implications of the growth in freelancing and their use of limited companies as a corporate form. The PCG summarised the report's main recommendations, the majority of which, it says, will be supported by its members.
- The report calls on HMRC to justify IR35 by publishing detail figures which clearly demonstrate the revenue that it protects – something which PCG have repeated called for. Like PCG, the Committee were not convinced by HMRC’s assumption that IR35 saves £550m.
- Progressive, forward thinking recommendations concerning the wider tax system, are made. The Committee correctly identifies that IR35 only exists because of the UK’s over complicated tax code. It specifically suggests the Government give consideration to the merging of income tax and National Insurance – again something which many leading tax experts have previously called for.
- The report highlights the ineffective use of the Business Entity Tests in their current format and recommends a full review.
- An important distinction is made between lower skilled, possibly vulnerable workers and higher skilled freelancers who have chosen to work in this way. This is a distinction that must be made if appropriate policies are to be developed for the two different groups.
- There is an important recommendation regarding the public sector rules. The Committee notes the guidance on the rules lacks clarity, leading to confused implementation of the rules across Government Departments. It calls on HM Treasury to take a more active role in ensuring a consistent approach to the Departments.
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