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HMRC must justify IR35 rules, say peers

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HMRC needs to do more to demonstrate that the revenue protection it claims for the IR35 legislation outweighs the costs it imposes, says the House of Lords Select Committee on Personal Service Companies in a recently published report. HMRC should also take steps to provide better and clearer guidance to those affected by the provisions.

The report recognises that the use of personal service companies has expanded significantly but notes that incorporation is not always driven by financial incentives, although personal service companies do offer tax and NIC savings. It also regrets the complexity of the provisions, which has fostered the development of an industry of professional advisers and accountants.

The report criticises HMRC for failing to collect sufficient information on how widespread the use of personal service companies really is. It suggests that this could be rectified by making the completion of the relevant parts of a personal tax return compulsory. The report also questions HMRC’s assertion that the abolition of IR35 would put £550m at risk, noting that this estimate is not directly substantiated by any publicly available information. It therefore encourages HMRC to publish a detailed assessment to justify maintaining IR35.

The report also suggests that HMRC should improve its guidance, in the event that IR35 is maintained, by publishing a guide setting out the basic differences between employment and self-employment. Additionally, the report expresses concerns that lower paid individuals, who are engaged through corporate forms including personal service companies, are unaware of the negative implications of such arrangements in relation to employment and pension rights, as well as potential HMRC investigations. The report recommends a wider review by the Low Pay Commission.

Finally, the report notes that the government’s guidance on off-payroll arrangements in the public sector is implemented inconsistently across departments. It recommends that the Treasury takes the lead in introducing measures to restore public confidence here.

Baroness Noakes, chairman of the committee, 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.’