Reviewing IR35 – The Select Committee on Personal Service Companies

The long-awaited IR35 review has finally come before the Select Committee on Personal Service Companies at the House of Lords, after their call for evidence in November.

The number of Personal Service Companies (PSCs) has increased and will probably continue to do so, while at the same time HMRC’s resources dwindle, so I can see why they would be keen to get this in order. Lots of submissions have been made both for and against IR35.

Interestingly, in November’s call for evidence, one of the House of Lords’ aims was to look at how PSCs were formed – so whether contractors are pressured by businesses to have a PSC, rather than joining an umbrella company. If they are forced should the responsibility for ensuring compliance with IR35 be placed on the business or the contractor? After all, in all practicality, PSCs are not the best choice for everyone, and of course, Managed Service Company legislation has not gone away.

The business entity test was the first step in reform, and was created to give clarity to contractors on how they stood with IR35, and can only help the House come to a final decision.

My view is that little will change. IR35, while not in the press through cases won, is a deterrent and most workers don’t want HMRC knocking on their door.

However, the big question on everyone’s mind is will dividend income be treated as earned income? If so, then IR35 has run its course.

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Take the Business Entity Tests, get 3 years IR35-free

At a recent providers’ meeting, HMRC presented an update on how things are changing in relation to the enforcement of IR35.

What was astonishing was the low number of enquiries previously undertaken, and the length of time they were taking.

The main message? This is unacceptable.

Moving forwards, HMRC has planned to increase the number of enquiries three-fold. It’s also looking to dramatically reduce the length of time each enquiry takes, and asking for reasons to support the worker’s status in the first letter should speed this up.

If evidence such as the Business Entity Tests can be provided to show that the worker is outside of IR35, HMRC has committed to closing an enquiry within eight weeks.

After this, if the decision goes in the worker’s favour, HMRC would commit to not investigating them for another three years.

Well, that’s a get out of jail card if ever I saw one.

If I were a contractor using my own limited company for the past few years, I would take the tests and have their results effectively draw a line under my previous years’ taxes and give myself a three year respite. Happy days…

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An employee or a freelancer? Inconsistency at the BBC

It’s funny that contractors seem to be getting all the headlines, even when the US election was going on.

So the BBC has undertaken a review of its 2,400 workers who had “off-payroll” arrangements, with some 800 earning over £50,000 now having to undertake a business entity test to ensure that they are legitimate freelancers, and 131 of them likely to be offered permanent contracts.

Interesting that only the higher paid workers have to do this test. Why not all workers?

I would have thought that the lower paid workers would be more likely to be caught by IR35, as the business entity tests revolve around control and supervision. After all, the higher up the earning chain, the less control and supervision you would get.

Danny Alexander said: “It’s essential that the public has confidence that publicly funded institutions have in place arrangements to ensure their staff pay proper tax.”

It would seem he’s now getting his wish, but aren’t the government missing a trick?

With the BBC admitting that its payroll arrangements are ”inconsistent”, resulting in on-air talent doing similar work but being classed as staff, self-employed or contracted through a personal service company, it begs what else was found in the reports prepared by Deloitte, and the reasons for off-payroll arrangements – if the BBC’s CFO is to be believed…

The union mentioned that all its members use legitimate tax arrangements – rather than personal service companies to avoid paying it – but I think he’s missing the point!

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Government department’s IR35 checks step up a gear

According to claims by contractor accountants Orange and Gold, one of its clients has reportedly received a letter from their employer – a government quango – asking that they either produce their payslips or clear off.

But not quite in those words.

The payslips are required as evidence to the quango that the contractor has been paying national insurance and is working within IR35. The concern is that limited company or personal service company contracting allows for tax abuse, and in some cases the right levels of contribution aren’t being made.

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From funny man to every day tax evasion

The first few months of the financial year have been busy, to say the least, what with taxation becoming high profile through Jimmy Carr and Take That’s avoidance, and Cameron’s reported haven. But it’s the lower profile cases – people working outside IR35 – that we’re more concerned with. And with the first rounds of the new IR35 consultation, tax isn’t a topic that’s about to die down any time soon.

The problem is, people are working but not paying national insurance. Limited company contracting gives them a way to do this, but people take a lot of risk; there’s no certain income and no employee benefits. And there’s possibly millions of limited companies out there. Some of them may be operating legitimately, and the government states that it does recognise them as a cornerstone of developing business. But many limited companies operate as a way for people to be creative with tax.

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