26 November 2013
Yesterday (November 25th) marked the first sitting of the House of Lords Personal Service Companies Committee, with IR35 legislation quickly becoming the biggest issue of the day.
The rules are intended to prevent tax avoidance through disguised employment by ensuring that those who work through personal service companies pay just as much tax as they would if they worked as direct employees.
However, there are a number of problems with attempting to define exactly what constitutes a personal service company: there is no single legal definition of the term, although Accountancy Age reports that limited liability companies with only one director are generally believed to fit the bill. On top of this, confusion reigns over the hazy definition of an “office holder”, which is vital to understanding who may or may not be covered by IR35.
Speaking to the committee, HMRC’s deputy director for employment status Rowena Fletcher explained that awareness of the rules is slowly growing within the business and contracting community. This is probably just as well, since the tax authority’s investigation teams are becoming even more active. In fact, Contractor UK reports that HMRC has released figures indicating more contractors were investigated under IR35 last financial year than in the previous five years put together. Robin Wythes, employment status team leader at HMRC, told the committee that 112 cases had been launched in the first half of this tax year, which could mean the department is set for another bumper year.
From the tax authority’s perspective, IR35 seems to be a necessary evil in the quest to draw in all the tax it believes it is owed: Ms Fletcher told peers that personal service companies pose an estimated £475 million risk to the Exchequer. IR35 is delivering on its supposed promise largely thanks to its efficacy as a deterrent, which also makes it difficult to tell exactly how far it has benefited the Treasury.
But the influence of industry on the use of personal companies was also raised in yesterday’s proceedings. In some industries, certain employers will only work with independent workers if they choose to operate as limited company contractors. In practice, this means that for certain freelancers, personal service companies are the only option regardless of IR35 rules.
The committee will be holding public hearings so different parties can give oral evidence until some time in January. Prior to this, anyone with an interest in the subject of personal service companies is invited to submit evidence to HMRC by December 31st. In spite of the relatively short turnaround time allowed, chair of the committee Baroness Noakes has said the group hopes to be able to report back to the House with recommendations in March.
In particular, they are seeking the views of interested parties on issues such as the burdens involved in IR35 compliance; whether HMRC’s attempts to improve how it deals with IR35 judgments have been successful; if businesses insist on working with personal service companies; and the wider advantages and disadvantages of operating through a personal service company.
I am a chartered tax advisor with a specialism in the freelance contractor sector advising contractors on how to structure their affairs and recruitment businesses and end hirers on the effective…
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