Here is a more detailed summary of the key conclusions and recommendations from the Lords Select Committee after hearing and receving evidence from HMRC officials, trade groups, industry and professional bodies and interested parties.
1. We recommend that Her Majesty's Revenue and Customs 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. (Recommendation 1, paragraph 73)
2. Serial contracting is a feature of the modern British workforce and is supported by both businesses and contractors. We heard that although IR35 is not a significant issue for businesses, it can arouse considerable hostility from contractors.
3. Moreover, we note that compliance with the rules can demand a great deal of time and effort on the part of contractors. We acknowledge that it can be difficult for individuals contracting through personal service companies to define their tax and National Insurance position quickly and accurately because of the contract-by-contract nature of IR35 and the need for a sound understanding of case law.
4. We believe that the abolition or suspension of the IR35 legislation as proposed by the Office of Tax Simplification, whilst attractive, would be unwise if the legislation has the Exchequer protection effect claimed for it by Her Majesty's Revenue and Customs.
5. The current structure and rates of income tax and National Insurance provide an incentive for taxpayers to arrange their financial affairs in order to minimise the amount of tax and National Insurance paid. This has lead to complex legislation, such as IR35, to counter such arrangements.
6. 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. (Recommendation 2, paragraph 89)
7. We acknowledge that businesses would generally resist being made responsible for IR35 assessment, finding the additional administrative pressure and liability as overly burdensome.
8. We recommend that Her Majesty's Revenue and Customs 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). (Recommendation 3, paragraph 98)
9. If Her Majesty's Revenue and Customs 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. (Recommendation 4, paragraph 99)
10. If Her Majesty's Revenue and Customs 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. (Recommendation 5, paragraph 100)
11. If Her Majesty's Revenue and Customs 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. (Recommendation 6, paragraph 101)
12. Her Majesty's Revenue and Customs did not convince us that the resources currently allocated were sufficient to ensure compliance with the IR35 legislation.
13. We recommend that Her Majesty's Revenue and Customs 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. (Recommendation 7, paragraph 113)
14. We conclude that many individuals simply take a risk that Her Majesty's Revenue and Customs will not look into their employment status, an attitude that is fostered by the decreasing number of compliance investigations.
15. We recommend that the Contract Review Service be publicised to greater effect, that Her Majesty's Revenue and Customs investigate ways to encourage individuals to use the service and that they look into ways to bolster confidence in its independence and impartiality. (Recommendation 8, paragraph 123)
16. We accept that the guidance will never be able to give absolute certainty to taxpayers of their status in relation to IR35 but we agree that the current guidance is far from satisfactory.
17. We recommend that Her Majesty's Revenue and Customs undertake a full consultation on how the Business Entity Tests could work better to provide greater certainty for taxpayers. (Recommendation 9, paragraph 134)
18. We commend the motive behind establishing the IR35 Forum as an opportunity for wider stakeholder engagement.
19. We recommend that Her Majesty's Revenue and Customs go to greater lengths to demonstrate that they are receptive to the feedback that is provided through this group and that they review the breadth of membership. (Recommendation 10, paragraph 140)
20. We are concerned that, in some sectors, individuals who are providing their services through personal service companies or, more often, umbrella companies and agencies, have a limited awareness of how they have been engaged to provide their work and who it is that has engaged them. This may mean that the individuals are not aware that they have foregone at least some levels of employment protection and benefits to which they would be entitled if they were in conventional employment. We recognise the complexity of the subject matter, and of the case law underpinning some of the distinctions made, but believe that it ought to be possible to present these issues in a concise and understandable manner.
21. We recommend 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. (Recommendation 11, paragraph 164)
22. We recommend 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. (Recommendation 12, paragraph 172)
23. As it is clear from the evidence that abuse of the expenses dispensations operated by umbrella companies is taking place, we recommend that Her Majesty's Revenue and Customs ensure that enforcement action is taken to end these abuses and to ensure that expenses dispensations are managed correctly. (Recommendation 13, paragraph 181)
24. We also recommend that Her Majesty's Revenue and Customs 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. (Recommendation 14, paragraph 182)
25. We acknowledge that there will be circumstances in which public sector organisations, just like private sector organisations, may need to acquire services from those who operate through personal service companies. For this reason, we believe that any blanket restriction on public sector use of personal service companies would not be beneficial to the delivery of public services.
26. The Treasury Review of off-payroll appointments provided only a limited assessment of the extent of such engagements; large areas of public service provision, such as local government and some health services, were not included in its scope.
27. We recommend 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. (Recommendation 15, paragraph 210)
28. As the guidance embodied in Procurement Policy Note 07/12 currently appears to be applied inconsistently across departments, we recommend that Her Majesty's 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. (Recommendation 16, paragraph 226)
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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 2012