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IR35 and PSC inquiry - Lords pour scorn on government and HMRC

Contractors, their use of personal service companies (PSCs) and HMRC’s enforcement of IR35 are all “regarded as unfinished business”.

This was Baroness Noakes’ conclusion on the government’s response to the House of Lords’ Select Committee on Personal Service Companies (PSCs) inquiry that she chaired.

In a Lords’ debate last night, a procession of select committee members queued up to pour scorn on the government and HMRC. In particular, peers were outraged by the refusal of Exchequer Secretary to the Treasury David Gauke to give evidence during the inquiry, or even to allow his Treasury officials to give evidence.

The response by Lord Newby on behalf of the government did little to reinforce its position.

BETs: “Not at all sure that any of these are working in an optimal way”

The government's response provides hardly any more information and I remain sceptical

Baroness Noakes

The introduction to the debate by Baroness Noakes left observers in little doubt that the Lords were taking no prisoners.

“The government’s response provides hardly any more information and I remain sceptical,” said Noakes. She noted that the committee had asked for clarity on the enforcement of IR35, but that the response from HMRC was basically, “We are doing a bit more than we used to do but we don’t know how much we are spending or what we get for it.”

From the response she concluded that it “gives no comfort that HMRC has a firm grip”.

On the topic of IR35’s enforcement, HMRC’s guidance and its new regime, including the business entity tests, Noakes said she was “not at all sure that any of these are working in an optimal way”.

Her conclusion was that: “the whole area of PSCs must be regarded as unfinished business.”

“Neither HMT or HMRC had a clear policy objective”

Noakes’ fellow committee members were equally scathing of the government’s response both during and after the inquiry. Lord Myners considered that the reasons for Gauke’s decision not to give evidence or allow his staff to do so were “frankly not acceptable”.

“The issues were not of HMRC’s implementation but much broader policy issues,” Myners highlighted, concluding that it was “not acceptable that officials should not give evidence” and the response from government was “flimsy”.

“Neither HMT [HM Treasury] nor HMRC had any clear policy objective and there was a lack of consistency in their answers,” Myners added. He suggested that it was clear that IR35 causes many problems, but it is not clear what IR35 is actually designed to do.

“Some fundamental questions have been raised about the operation of an area of the labour market that is increasing in importance and substance, but the message from the Treasury is that they really don’t want to take this seriously at all.”

Lord Palmer of Childs Hill questioned whether there was any benefit at all of having IR35 as a deterrent, given the industry that has grown to avoid it. He was not happy with the government’s response and proposed abolishing IR35, believing that it would result in “no noticeable loss to the Exchequer”.

The UK’s complex tax system is at the heart of the problem

According to Lord Hope of Craighead, the inquiry was hampered by the fact that “some employer groups, and notably the Treasury, were reluctant to give us any facts at all”. He believes that “the complex nature of our income tax and National Insurance (NI) system is at the heart of the problem.”

Baron Higgins was also concerned about the attitude of the government to the issue of PSCs and IR35, and “surprised” by the lack of cooperation from the government. He believed that Gauke’s excuse for not contributing was “quite absurd” and hoped that Lord Newby would “be able to give a better explanation as to why the Treasury was so uncooperative”. Newby subsequently failed to do so.

Higgins also suggested that “quite clearly a great deal has to be done to improve the present situation”. He also expressed concern about HMRC’s estimate of the exchequer risk of £550m: “We have serious doubts about how reliable that estimate is.”

“A lack of rigour and function on PSCs by HMRC”

If the earlier criticisms were deemed to be harsh, it was clear that the Lords were just getting started. Baroness Morgan of Huyton continued the battering, opining that there: “Appeared to be generally a lack of rigour and function on PSCs by HMRC.” She believes that there are insufficient resources available for compliance and a lack of clarity about what form compliance should actually take.

In Lord Stewartby’s opinion, “very little action had been taken” over IR35 and he wondered if the authorities have any objectives of their own. “How would we know if we had done a good job or not if we did not know what we were meant to be doing?” was his observation on the government’s handling of PSCs and IR35.

The closing summary by Lord Davidson of Glen Clova before the government’s response was somewhat more conciliatory. However, he supported the committee’s recommendations and believed that the explanation of the Exchequer Secretary Gauke for not giving evidence to be “absurd”.

“HMRC investigations can be immensely disruptive,” noted Davidson. He added that there has been a 70% decrease in enforcement activity and questioned whether this was a decrease in resources or in will.

Still “a clear need for IR35”, insists government

Despite all of the evidence to the contrary, the government’s representative Lord Newby confirmed that the Treasury and HMRC has taken the Lords’ report “seriously”. Work was now “underway”, particularly in regard to the service company question in self assessment tax returns.

But he emphasised that although the debate has confirmed that there is an important role for PSCs in the UK economy, there is still a “clear need for IR35”. Once again, the IR35 Forum featured prominently in the response, but that gained little traction with the committee members present.

At the end of the debate, Noakes concluded by saying that if Gauke’s practice of avoiding Lords’ inquiries became more widespread, it would be a “get out of jail card for ministers if they did not like the subject matter.” In an unusual move, she asked that the discourtesy to the House of Lords be noted.

Published: 18 June 2014

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