Contractors and vulnerable agency workers are two distinct groups when analysing the use of personal service companies (PSCs). This was the clear message from the latest evidence session of the House of Lords inquiry into PSCs, which saw union representatives slam umbrella companies and recruitment agencies for their treatment of agency workers.
The focus from business organisations was on the many valid reasons for using PSCs that were not related to tax avoidance. Indeed, the Confederation of British Industry’s director of employment and skills, Neil Carberry noted: “If there was no such thing as taxation there would still be a large number of PSCs.”
And the head of taxation at the Institute of Directors (IoD), Stephen Herring, highlighted to the Lords that “HMRC needs an appropriately nuanced response not to look at personal service companies as automatic evidence of some form of tax avoidance.”
PSCs are not the problem, agencies and umbrella companies are
Considering that the witnesses were supposed to be focusing on Personal Service Companies, the first session featuring representatives from two unions and TaxAid spent most of the hour discussing umbrella companies.
Despite this focus, the witnesses still managed to largely misinform the Lords about how onshore and compliant professional employment services providers actually operate.
TaxAid’s technical director Frances Corrie confirmed that, because of the income levels of most of her organisation’s clients, she didn’t “see all that much” PSC use, although it is frequently offered as an option to low income workers.
Chris Keates of the National Association of Schoolmasters Union of Women Teachers (NASUWT) explained that the union has identified over 200 umbrella companies, and that they “tend to be set up offshore”.
“False self-employment the scourge of the [construction] industry”
Regional secretary for the Eastern Region of the Union of Construction, Allied Trades and Technicians (UCATT) Brian Rye was damning about employment intermediaries in the UK construction sector.
Rye said that operating solutions went through phases that have seen composite companies come and go, and then umbrella companies arrive and then start to wane. Now in the ascendance are what he described as ‘payroll companies’.
When questioned by committee chairman Baroness Noakes on the proportion of PSC use as opposed to these other solutions, Rye couldn’t answer: “The scene constantly changes,” he said, “I don’t have the information.”
HMRC is not using the enforcement tools that it has
On how to tackle the perceived non-compliance by service providers and agencies, Rye was adamant that HMRC knew exactly what was going on but took no action, stating that there is a “failure to police and enforce the existing tax legislation.”
He continued: “The vehicles that are used [in the construction industry] are for the sole purposes of denying the employment relationship [between worker and end user] and the tax and National Insurance (NI) contributions that should be made are not made. It is the enforcement of the legislation that we have which is what is required.”
Keates view was that legislation such as the Agency Workers Regulations (AWR) should be better enforced, alongside bringing back recruitment agency quality marks that were dumped during the Cabinet Office’s Red Tape Challenge.
Separate highly skilled contractors from vulnerable temps and agency workers
The business organisation session began with Carberry saying at the outset that it is “important that we divest the treatment of personal service companies, which are traditionally for highly skilled and remunerated workers, from some of what we are hearing in the last session”.
Carberry went on to highlight four key reasons, unrelated to tax avoidance, why PSCs are used:
- Certain contracts require all parties to be corporate entities
- When creating joint ventures that require the particular skills of an individual, it is easier to structure the deal with a PSC
- Many independent professionals simply insist on using a PSC as a form of engagement
- For companies, contracting a worker via a PSC offers risk management advantages when compared to taking on an employee.
Carberry also identified two drivers for the increasing use of PSCs. The first is cyclical, that in times of economic uncertainty, businesses look for the flexibility afforded by hiring workers using PSCs.
If there was no such thing as taxation there would still be a large number of PSCs
Neil Carberry, CBI
The second is structural, as Carberry explains: “Companies are increasingly feeling competitive pressure across large numbers of sectors and one of the ways that companies have looked to, to allow for that competitive pressure, is to more closely align labour input to demand – and clearly more flexible forms of employment allow that.
“I don’t think it is any surprise that we have seen a growth in more flexible forms of employment generally,” he added.
“You can’t legislate to take things back to how you might prefer they were”
Herring agreed, noting that the increase in flexible working is also down to how supply chains are being managed. When a company takes on a new contract from a new customer, it will hire flexible workers initially to fulfil the contract.
“There is always a concern about being left with the employees but no customers,” he said. He added that the business environment has changed and that “you can’t legislate to take things back to how you might prefer they were. If there was no taxation there would still be supply chains and an increased number of PSCs.”
When pressed on whether he has experience of workers being forced into PSCs, Herring replied: “I don’t think I would like to draw the conclusion that individuals are being pressed into them. It is the only way the person bidding for [a] contract may be able to obtain that work.”
When asked about the effectiveness of the IR35 intermediaries legislation and HMRC’s enforcement, Herring warned against HMRC believing that every personal service company has been formed simply for tax avoidance.
Former accountant Herring went on to say: “Indeed, quite often when the costs of managing the intermediary [PSC] are factored in there is no tax saving.”
Carberry’s response was: “While we think the IR35 legislation is largely working, we have made clear to HMRC in the past our concern about enforcement and the appropriateness of enforcement.”
How much extra tax could IR35 generate?
The witnesses were then asked what level of extra resource might be required and how much extra tax could be raised as a result of better IR35 enforcement.
On increased yield, Herring replied: “It would be an incredibly difficult thing to calculate as the great majority of [PSCs] are being properly advised and properly accounting for their tax and NI liabilities, so most HMRC investigations would draw a blank.”
This was the last of the evidence sessions shown so far in the committee’s schedule, although there is potentially time for more witnesses to be called. What has been interesting so far is that no actual users of PSCs, such as contractors and freelancers, have been called to provide evidence, although some individuals have provided written evidence.
ContractorCalculator will continue to provide news and analysis as the inquiry continues.