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HMRC needs to demonstrate that the revenue protection it claims for the IR35 legislation outweighs the costs it imposes, the House of Lords Select Committee has stated, in a report welcomed by the recruitment sector.
The government body also needs to provide better and clearer guidance to those affected by the provisions, and questions about service companies on personal tax returns and employer year-end declarations should be compulsory, the select committee’s report stated.
“HMRC failed to demonstrate that it had a sound basis for the £550m of tax and national insurance that it cited as being at risk if IR35 were abolished or suspended,” said Baroness Noakes, chairman of the Committee.
“The deterrent nature of the IR35 legislation is its main rationale. We recommend that HMRC publish a detailed assessment of this figure and we also call for an assessment to be made of the cost to the taxpayers affected by the rules.”
The report also said that HMRC should consult on revising the ‘Business Entity Test’ and make the Contract Review Service more effective.
The REC welcomed this final point, stating that the report was useful. “We’re pleased that the House of Lords committee has taken on board our specific recommendation that the Business Entity Tests need greater clarification,” said Amanda Ciske, REC policy adviser. “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.”
APSCo’s head of external relations and compliance, Sam Hurley, was asked to give evidence at the Select Committee. “One of the questions I was asked at the enquiry related to the effect of the Agency Workers’ Regulations and why this has caused an increase in the use of PSCs,” she said.
“I explained not only the very clear distinction between the highly skilled/highly paid contractor and the lower paid/lower skilled worker but also the fact that professional contractors – who are in business on their own account – neither want nor seek the employment-related protections afforded by such legislation.
“We were extremely pleased therefore that the report acknowledged that while there has been an increase in the use of PSCs, that this was actually due to a number of different factors – including the growth of the flexible labour market – and that this isn’t necessarily a bad thing,” she added.”
PCG, the freelancers’ association, went further, calling for IR35 to be suspended while proper consideration is given to its abolition.
“The conclusion of the Committee is that abolition or suspension of the IR35 legislation, whilst attractive, would be unwise if HMRC can prove it provides Exchequer protection to the tune of £550million,” said Chris Bryce, CEO.
“The simple fact is, HMRC cannot do so. PCG has repeatedly asked HMRC to justify the £550m figure and the so-called ‘deterrent effect’ but HMRC has been unable or unwilling to do so. It is now clear from the findings of the House of Lords Select Committee that the effectiveness of this legislation and the justification for its continued existence is built on smoke and mirrors.”
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