HMRC must do more on IR35 legislation

07 April 2014

Her Majesty's Revenue and Customs need to do more to demonstrate that the revenue protection they claim for the IR35 legislation outweighs the costs it imposes says the House of Lords Select Committee on Personal Service Companies in its report.

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 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."

Other findings

Baroness Noakes continued:

"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."

Further information

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