HMRC need to do more to justify the continuing existence of the IR35 legislation, say House of Lords

07 April 2014

A House of Lords Select Committee has published their report on Personal Service Companies.

A call for evidence conducted by a Select Committee of the House of Lords was launched in November 2013 into the use of Personal Service Companies. The Committee focussed on five main areas during this inquiry:

  • The use of personal service companies, relevant legislation and recent trends;
  • The continuing viability of the IR35 legislation;
  • HMRC’s administration and the effect of recent reforms;
  • Implications for the lower-paid; and
  • The public sector.

The CIPP and the AAT worked jointly on a survey to obtain views from their members working within payroll, tax and accountancy. The evidence from our survey shows that current legislation and guidance is not clear enough, is confusing and is not necessarily aimed at the right groups of people. Current consultation methods are not thought to be effective and as such the CIPP and AAT will support the Committee and work with them in any future consultation work. The full response is available to download through this CIPP News page.

In today’s press release, the Select Committee state that HMRC need to do more to demonstrate that the revenue protection they claim for the ‘IR35’ legislation outweighs the costs it imposes. HMRC should also take steps to provide better and clearer guidance to those affected by the provisions.

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 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.

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.”

The report and transcripts of evidence sessions and submitted written evidence are available on the Committee’s webpage.

The government is expected to respond to the report within two months, after which both the Committee’s report and the government’s response will be debated in the House of Lords in due course.