Contractors using personal service companies should as a group undergo 20,000 investigations each year by an HMRC taskforce of 3,000 to be policed properly for IR35. This is what the House of Lords Select Committee on Personal Services Companies (PSCs) inquiry was told by the Association of Chartered Certified Accountants’ (ACCA) Jason Piper, one of the latest witnesses giving evidence
“Our understanding is there are 250 [IR35] enquiries per year,” Piper explained to the committee. “So, if there are 200,000 PSCs, then 0.1% are being investigated, which on the face of it means either IR35 is a good deterrent, or people have sorted things out and know to get outside it.” He pointed out though that few people in the Committee room thought IR35 was acting as a good deterrent.
The message from the six witnesses in the second evidence-gathering session is that IR35 is too complex for the average limited company contractor, or PSC owner, to understand. It also became clear that it is impossible for HMRC to police 600,000 one-person limited companies with a team of only 40 HMRC inspectors and support staff.
IR35 not behind the surge in PSC numbers
The first set of witnesses were:
- Academic Professor Judith Freedman, Pinsent Masons Professor of Taxation Law at the University of Oxford
- IR35 expert Kate Cottrell of Bauer & Cottrell
- Robin Williamson, technical director of the Low Incomes Tax Reform Group.
Freedman highlighted that there was no “empirical evidence” that the rapid increase in the number of PSCs since IR35 was introduced in 2000 had anything to do with the legislation itself. And Cottrell questioned HMRC’s estimate that there are 200,000 PSCs, highlighting that there is no definition of a PSC, a point which arose in the first evidence session.
Williamson noted that the “push factor” for companies is pretty irresistible because of the employers National Insurance Contributions (NICs) savings they stand to make. This has led to a proliferation of all sorts of schemes, not just PSCs, to enable workers to work for clients without actually being employed by them.
IR35 is both little known and poorly understood
Cottrell maintains that there are lots of people who don’t know what IR35 is, and that there is not enough information out there. She highlighted that getting it wrong places an enormous burden on the worker, and that more visible compliance is required.
Williamson suggested that a two-pager fact sheet should be produced to get the message out to people, but Freedman disagreed. IR35 is very complicated, she said, pointing out that it isn’t easy to communicate and won’t ever be unless the source legislation is changed.
Cottrell warned that the business entity tests (BETs) in their current form add to the confusion, and that they are being used as status tests when in fact they are only designed to assess the level of risk.
She believes that it would be good to have a test, but unless the legislation is changed it only adds an additional layer of complexity. Freedman agreed, adding that it is very hard to define a real business.
The witnesses were asked whether the tax advantages of using PSCs would go away, should NICs be rolled into income tax? Freedman replied it would but only if dividend income were included, and, she said, that is never going to happen.
IR35 needs 3,000 HMRC staff to conduct 20,000 reviews each year
The second evidence session featured representatives from the accountancy and tax professions:
- Frank Haskew, head of the tax faculty at the Institute of Chartered Accountants in England and Wales (ICAEW)
- Jason Piper, technical manager of tax and business law at the Association of Chartered Certified Accountants (ACCA)
- Patrick Stevens, tax policy director at the Chartered Institute of Taxation (CIOT).
It was Piper who noted that there are 600,000 limited companies with a single director, and HMRC’s estimate that 200,000 are PSCs is not unreasonable. But if there are only 250 IR35 investigations each year, then only 0.1% are being investigated.
There are 'quite clear incentives' to use PSCs
Jason Piper, ACCA
He said that this is a very small number of investigations for such a large population of targets, and that HMRC would be better off looking at 20,000 investigations per year to police it properly. “If you do a pro rata calculation, it would need 3,000 staff,” said Piper.
“Quite clear incentives” to use PSCs
According to Piper, it is the tax policies of the past 25 years that have changed the rules, so that there are “quite clear incentives” to use PSCs. Stevens agrees, highlighting that the UK tax systems favours the self-employed over the employed, and that the risk of ticking the ‘not in IR35’ box and being found out is very small.
In that vein, Stevens suggested that because IR35 is self-policing, then it might be best for a third party to be conducting the assessment, making the decision about status and then completing the resulting tax calculations.
The session closed with chairman Baroness Noakes saying that the evidence has “increased our knowledge, but I am not sure that we have reached wisdom yet”.