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The original report from the House of Lords was fairly critical of the lack of concrete information which was available to justify IR35 and, among 16 recommendations, asked for more information.
The Government side-stepped many of the recommendations, while pointing to existing reviews and work already underway.
However, much of the reactions from the sector was relief at what was not in the report, rather than annoyance about what was. There has been some concerns that the report might trigger more attempts at legislative change which would bring with them another set of as yet unknown problems
PCG - Assumptions not facts
PCG, the representative body for freelancers, was one of the more unhappy groups with the outcome of the Government's response to the report and felt that it showed that the Government - or HMRC - is unable to justify its justification for IR35.
Andy Chamberlain, Senior Public Affairs Manager at freelancer group, the PCG, said: “PCG are disappointed but not surprised by the Government’s response to the House of Lords Select Committee on PSCs.
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Regarding the costs of administrating IR35, Andy Chamberlain said: “On the issue of costs of administrating IR35, the Government again dodge the question. It claims it cannot provide a detailed figure due to the concentration of IR35 compliance work in specialist teams, and the fact that some staff from outside the teams occasionally assist them. This feels like a cop-out. Surely the Government should have instructed HMRC to undertake a costing – this is what the Committee called for in their report.”
Despite this disappointing response, there was some good news for the group as it was encouraged by the Government's acknowledgement of the contribution freelancers make to the economy. Mr Chamberlain said: “PCG welcomes the Government’s acknowledgement of ‘the positive contribution to the economy of those who choose to work for themselves’ and that ‘the use of a personal service company is not indicative of tax avoidance’.”
FCSA - Welcome
Industry representative body, the Freelancer and Contractor Services Association (FCSA) welcomed the report, particularly the emphasis on the importance of the flexible workforce, and the legitimate use of PSC’s by 'genuinely self-employed individuals' and the role played by compliant umbrella businesses. :
They also felt that no news was good news in so far as there were no proposed changes to IR35 other than continuing to try to improve its administration and enforcement.
FCSA Chief Executive, Julia Kermode, said: “As a contributor to the Select Committee review process, we are particularly pleased to see that the Government recognises the contribution of the flexible workforce. Of course, there is clear consistency in the message of compliance, and whilst IR35 is not straight forward, we are pleased that there is no new legislation imminent that could harm economic recovery and unduly target the genuinely self employed.
"We welcome the commitment to strengthen the administration and enforcement of the current legislation. We firmly believe that transparent and detailed compliance standards are the true differentiators between best and poor practice.
“We urge all stake holders in the recruitment industry to embrace compliance as an advantage for the long term not simply a nice to have”.”
Optionis - Clear and consistent
the Optionis group (Parasol and Clearsky accountancies) was also pleased that there were not going to be any significant changes.
The chief executive Rob Crossland said: “It’s good to get a formal Government response on this second review into PSCs and IR35.
“In essence, the Government is re-emphasising its previously confirmed position on IR35, namely to keep the legislation in its current form and improve enforcement. Indeed, the Government position now seems fairly clear and consistent.
“It’s pleasing to see the importance of the flexible workforce, along with the legitimate use of PSCs by genuinely self-employed individuals and the role played by compliant umbrella businesses, being recognised by policymakers.
“Given the improving economic environment and the importance of the flexible workforce in this, a degree of stability is very helpful. The last thing contractors, service providers and recruitment firms need at this point is more legislative change.
“We support HMRC’s ongoing efforts to improve the administration and enforcement of IR35, and through the Freelancer and Contractor Services Association (FCSA) are involved in this process.”
APSCo - Concerned
Agency group APSCo was also concerned that HMRC seems unable to verify the often quoted figures as to the amount of tax IR35 allegedly raises.
One of the recommendations was that HMRC carries out and publish a detailed assessment of the current Exchequer protection figure – and of the costs that taxpayers incur when dealing with IR35. The Government says that it is confident that the figure quoted for Exchequer protection from IR35 and the methodology used in the calculation of that figure, is robust. However, the Government acknowledges that it could further clarify and amplify how IR35 figures have been calculated and has said that it will publish an updated administrative impact assessment during the Autumn.
Samantha Hurley from APSCo said: “We’re concerned that HMRC’s amplified calculations are based on figures which appear to be quite old (2008/9 and 2010/11), and that there appears to be a good deal of guess work involved, particularly around salary levels and the behaviour of company directors. However, we’re encouraged that HMRC has promised an updated administrative impact in the Autumn."
The Government also said that it recognises that many individuals choose to work through PSCs and that it appreciates the positive contribution people working for themselves can make to the economy. However it is also concerned that people can use intermediaries to disguise what would otherwise be employment income. It says that the IR35 legislation seeks to ensure appropriate taxation and tackles avoidance. However it does concede that the tax system should continue to recognise the additional risk taken by those who are genuinely in business for themselves.
Samantha Hurley said: “We welcome HMRC’s continuing confirmation that it appreciates the positive contribution to the economy by those working for themselves, and that such additional risk should be recognised in the tax system. APSCo will continue to engage with HMRC through our membership of the IR35 forum to help raise awareness of the professional sector, which so often suffers unintended collateral damage when otherwise laudable legislation is put in place to protect the vulnerable.”
The Government has, at the request of the Select Committee, also looked at ways in which income tax and National Insurance could be more aligned but says that since employers are already adjusting to a significant number of reforms to payroll systems, it will wait for further progress on planned operational changes to the tax system before considering further changes.
Samantha Hurley said “We welcome the Government’s decision to wait before making radical changes to the tax and national insurance system, as we believe businesses, particularly in the recruitment profession, are already struggling to keep up with the numerous and burdensome changes in legislation introduced in recent years.
"APSCo continues to engage with HMRC through its work on the IR35 Forum, which is currently undergoing a review of a number of aspects of HMRC’s compliance activity regarding IR35, including the relevance and on-going effectiveness of the Business Entity Tests, the Contract Review Service, and HMRC’s IR35 guidance.”
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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