HMRC failed to demonstrate that ending IR35 could lead to £550m revenue loss
7 April 2014
HM Revenue and Customs (HMRC) failed to demonstrate that it had a sound basis for its view that the abolition or suspension of false self-employment legislation IR35 could result in an annual loss of £550m to the treasury, according to a House of Lords report.
Mon, 7 Apr 2014HM Revenue and Customs (HMRC) failed to demonstrate that it had a sound basis for its view that the abolition or suspension of false self-employment legislation IR35 could result in an annual loss of £550m to the treasury, according to a House of Lords report.
The report by the House of Lords Select Committee on personal service companies (PSCs), published today, calls on HMRC to do more to demonstrate that the government could lose this amount in tax and national insurance.
The chairman of the committee, Baroness Noakes, says: “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.
"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.
Andy Chamberlain, senior public affairs adviser at freelancers’ representative organisation PCG, a body that has consistently called for the abolition of IR35, tells Recruiter that the report “raises serious questions about the validity of IR35”.
“It questions the deterrent effect of IR35 and asks HMRC to justify the £550m of revenue saved annually.
“PCG eagerly anticipates the government’s response to the report and to having further conversations with government about what we can do to improve the situation for freelancers.”
In a statement, HMRC says: "Many personal service companies are used for genuine commercial purposes, supporting labour market flexibility, but the report also recognises that some are used for tax and national insurance avoidance, underscoring the continued importance of the IR35 rules.
"We will continue to work closely with stakeholders such as the IR35 Forum to make the rules easier to operate in the interests of the majority of taxpayers who play by the rules."
The report also recommends that HMRC consult on revising the business entity test. This was introduced in May 2012 as a way for contractors to assess their risk of being caught by IR35 and of an HMRC investigation leading to a full-scale HMRC inquiry into their tax affairs.
Amanda Ciske, policy adviser at the Recruitment and Employment Confederation, says: “This is a useful report. We’re pleased that the House of Lords committee has taken on board… that the business entity tests need greater clarification. However, we have to remember that HMRC has no official obligation to act on these recommendations, so we’ll have to wait and see what happens next.”
Sam Hurley, head of external relations at the Association of Professional Staffing Companies, who gave evidence to the committee highlighting concerns that the test was being misused in the public sector, says: “We therefore particularly welcome the call for the revision of the business entity tests – an issue the IR35 Forum is currently looking at.”
The report also noted that low-paid workers employed via personal service companies may not be aware that this means they have fewer employment rights. Baroness Noakes continues: “We believe that this is something which needs to be thoroughly assessed by the Low Pay Commission.
The report by the House of Lords Select Committee on personal service companies (PSCs), published today, calls on HMRC to do more to demonstrate that the government could lose this amount in tax and national insurance.
The chairman of the committee, Baroness Noakes, says: “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.
"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.
Andy Chamberlain, senior public affairs adviser at freelancers’ representative organisation PCG, a body that has consistently called for the abolition of IR35, tells Recruiter that the report “raises serious questions about the validity of IR35”.
“It questions the deterrent effect of IR35 and asks HMRC to justify the £550m of revenue saved annually.
“PCG eagerly anticipates the government’s response to the report and to having further conversations with government about what we can do to improve the situation for freelancers.”
In a statement, HMRC says: "Many personal service companies are used for genuine commercial purposes, supporting labour market flexibility, but the report also recognises that some are used for tax and national insurance avoidance, underscoring the continued importance of the IR35 rules.
"We will continue to work closely with stakeholders such as the IR35 Forum to make the rules easier to operate in the interests of the majority of taxpayers who play by the rules."
The report also recommends that HMRC consult on revising the business entity test. This was introduced in May 2012 as a way for contractors to assess their risk of being caught by IR35 and of an HMRC investigation leading to a full-scale HMRC inquiry into their tax affairs.
Amanda Ciske, policy adviser at the Recruitment and Employment Confederation, says: “This is a useful report. We’re pleased that the House of Lords committee has taken on board… that the business entity tests need greater clarification. However, we have to remember that HMRC has no official obligation to act on these recommendations, so we’ll have to wait and see what happens next.”
Sam Hurley, head of external relations at the Association of Professional Staffing Companies, who gave evidence to the committee highlighting concerns that the test was being misused in the public sector, says: “We therefore particularly welcome the call for the revision of the business entity tests – an issue the IR35 Forum is currently looking at.”
The report also noted that low-paid workers employed via personal service companies may not be aware that this means they have fewer employment rights. Baroness Noakes continues: “We believe that this is something which needs to be thoroughly assessed by the Low Pay Commission.
