The House of Lords inquiry into the use of personal service companies ('PSCs'), those limited companies used by freelance contractor and consulting businesses, has given its verdict.
In summary, it has not recommended any tightening of the IR35 legislation, nor any further crack down on PSCs to boost tax revenues. Equally, neither has it recommended the abolition or suspension of the IR35 rules.
A significant part of its recommendations are around HMRCs justification for the rules being in place at all, however - the Lords do not believe that HMRC sufficiently evidenced the amount of tax revenue they claimed was being legitimately protected by the legislation and nor did they have confidence in the cost benefit of the measures - a £700,000 department which brought in £1.1m in enforcement revenues last year. They were clearly not convinced by HMRC's evidence and have called on officials to better justify the cost to the tax payer of IR35 by substantiating its figures for the tax avoided by the use of PSCs and prove that it outweighs the cost.
The Revenue's guidance around IR35 also came in for criticism, with the inquiry recommending that a consultation be carried out with a view to improving the clarity and reliability of the Business Entity Test for tax payers, as well as improving its Contract Review Service and reviewing, clarifying and substantiating the need for PSC usage questions on the annual self-assessment tax return.
The inquiry also encouraged HMRC to take more notice of the IR35 Forum itself, when assessing and reviewing the rules and dealing with issues.
There were specific recommendations for the public sector, as well as a recommendation to look at the tightening up of abuses on expense rules used by umbrella companies.
In summary, quite a positive outcome for the contractor:
- No further tightening of IR35 and no call for an increase in related investigations
- HMRC being asked to better justify the need for the rules themselves
- And being asked to review, improve and clarify its guidance.
It is hoped that there is an overall recognition that the UK economy relies substantially on skilled contractors and that the legislation is no longer fit for purpose in a world where genuinely working for oneself, on a freelance basis, is a choice being made by more and more professionals and businesses.