HMRC slammed in House of Lords Report – IR35 update

IR35 update

The House of Lords Select Committee has published a report on Personal Service Companies in which they make a series of recommendations, many of which do not show HMRC in a good light and no doubt reflect what many Contractors have been thinking for a long time!

The first recommendation suggests that HMRC carry out a detailed assessment of how much IR35 costs to enforce, so that a better assessment can be made on whether it’s having the intended effect and is proportionate.   The Committee accept that abolition of IR35 as proposed by the Office of Tax Simplification would be attractive, yet sadly deems it unwise if the legislation does indeed have the effect that HMRC claim.  HMRC have stated in the past that IR35 saves £550m so it will be interesting to see this figure justified.

The paper then goes on to acknowledge that the IR35 rules demand a great deal of time and effort by Contractors, and that it can be difficult for them to quickly and accurately know what their tax liabilities are given the contract by contract nature of IR35 and the need to have an understanding of case law.  Our own experience in talking to Contractors reflects this, with many feeling very exposed due to not having the time or expertise to really feel sure of their own status.

The Business Entity Tests also feature, which the Report suggests should be reviewed to see if they can work better to provide certainty for taxpayers.  HMRC’s Contract Review Service should also be publicised more, although how many Contractors trust HMRC to be impartial is another matter!

Other interesting points in the report concern making the Service Company question on the P35 and Tax Return mandatory fields, if HMRC deem them necessary, and a further review on the possibility of merging tax and National Insurance.

It will be interesting to see where this goes, so we’ll keep you updated as we know more.

Read the full report via the PCG website.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

IR35 business entity

IR35 business entity

Are the latest proposals for the weightings to be applied to the IR35 business entity a fair reflection of being truly in business on your own account? Can they be manipulated to give the answer you want without anything actually changing in the way you work?

Overall the business entity test weightings do appear to be unfair in terms of describing a PSC as being in ‘business on your own account’. Some of the questions simply would not be reasonably applicable to many contractors. For example, very few contractors would ordinarily need to own or rent their own business premises (worth 10 points if you do). Another example is the definition of Client Risk – ‘Have you been unable to recover payment amounting to more than 10% over the last two years?’ (worth 10 points if yes). This seems an odd and undesirable way to prove you are genuinely self-employed! Other questions attract what seem to be unreasonably few points, like the Billing test – ‘Does the business invoice for work carried out before being paid and negotiate payment terms?’ This could be a legitimate way for a genuinely self-employed individual to bill, but is worth only 2 points if yes.

The test has, understandably, come under severe criticism. The matter is still being hotly debated within the IR35 Forum as contractors have become alarmed that many will fall into the ‘high risk’ of IR35 investigation category despite being genuinely in business on their own account. However, a key point to remember is that this is essentially a self-assessment tool to alert you to possible areas of concern. It is not the IR35 test itself which takes into account a wider range of factors, the most important being the actual working conditions not just the wording of the contract. Ideally the wording should accurately describe your actual working practices while engaged with the client and it is these which ultimately prove compliance with IR35 or otherwise. For this reason, having each of your contracts professionally assessed for IR35 compliance can be crucial in reducing risk. If your contract is assessed as IR35 compliant and accurately describes how you go about your work for the client you are significantly lowering your risk of HMRC investigation under the current regulations.

The questions in the test are all factual ‘yes’ or ‘no’ answers so it’s not possible to manipulate them in any way. However, with IR35 complaint contracts in place and working practices which are genuinely self-employed in nature the results of this test will not fundamentally change anything and should not affect the way you usually work.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.