Having heard evidence from a host of experts before publishing its findings, the Committee says that the Government needs to prove that IR35 yields “£550m” for the Treasury each year (mainly as a result of its deterrent effect) in order to to justify the existence of the legislation.
Given the complexity of IR35 (the Intermediaries Legislation), and the difficulties experienced by many individuals when trying to comply with it, the Lords also slammed the available HMRC guidance as “far from satisfactory.”
Unsurprisingly, the most vocal opponent to IR35 since it’s creation – contractors’ group, the PCG – has called for the rules to be suspended.
Key findings from the Select Committee
- The Committee has urged HMRC to carry out a “detailed assessment” of the amount of revenue IR35 actually raises, to establish whether or not the legislation “is having the intended effect and is proportionate.” (HMRC has long stated that the Treasury would lose £550m per year if IR35 were abolished.)
- The Committee acknowledges that many contractors are “hostile” to IR35, and find it difficult to work out their tax and NI positions easily, since IR35 is applied on a contract-by-contract basis.
- The report recommends that HMRC re-examine whether or not they require an accurate response to the “service company question” which appears on personal self-assessment returns, and the end-of-year RTI payroll declaration. If so, answering whether or not an individual was working for a ‘service company’ during the previous tax year should be made compulsory.
- The Committee is not convinced that HMRC had sufficient resources to police IR35, and as a result, it says that many individuals “simply take a risk that Her Majesty’s Revenue and Customs will not look into their employment status.”
- The current IR35 guidance has been slammed by the report as “far from satisfactory”. It suggests that a simple guide to the difference between ’employment’ and ‘self-employment’ is created, and widely distributed.
- The Committee also suggests that the controversial ‘Business Entity Tests’ are given an overhaul to provide “greater certainty” for those potentially affected by IR35.
- The report suggests that the Treasury’s recent clampdown on the hiring of limited company contractors by public sector bodies was misguided, and that any ‘blanket ban’ on contractors would “not be beneficial to the delivery of public services.”
Calls for IR35 to be abolished
Following publication of the Committee’s report, CEO of the PCG, Chris Bryce, says that until HMRC can justify its claim that IR35 raises £550m for the Treasury each year (via its so-called deterrent effect, or otherwise), then IR35 should “be suspended while proper consideration is given to its abolition.”
“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.”
Need for clarity in other areas too
The chief executive of Optionis (which includes Parasol and ClearSky Accounting), Rob Crossland, said that it was “extremely refreshing to see some political support for contractors.”
However, Crossland also noted that “it is ironic that the Lords’ call for greater clarity comes just as the new false self-employment measures – a source of confusion and anxiety for limited company contractors – come into force.”