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.

Personal Service Company – Tax returns

Personal Service Company – Tax returns

Answering the question about PSC (personal service companies) when I complete my personal tax return. Do I have an IR35 issue when I tick this box as a “yes”. Is it anything to worry about? Or is it just a simple “yes” answer? What is the definition of a PSC?

Ticking ‘yes’ to the PSC (personal service company) question on your personal tax return does not mean that you will have an IR35 issue. It is nothing to worry about as the term ‘PSC’ simply describes the type of company you have and is a separate matter to the issue of IR35 compliance.

A Personal Service Company is an HMRC description which helps them define what kind of business you are and it’s set-up so that they can make the relevant tax deductions on your income. IR35, on the other hand, is specifically about whether work done by an individual complies with the criteria of being ‘employed’ or not. For IR35 purposes being deemed a PSC doesn’t make any difference to the compliance criteria which must be met. Compliance is only concerned with whether the services you carry out for your client are done in a way which could be deemed as ‘self-employed’ and therefore outside IR35 or ‘employed’ and inside IR35. If you are deemed to be ‘employed’ then your tax payable will be determined by the Deemed Salary calculation whether you are a PSC or not.

The key point for a contractor with a Limited Company is to make sure that you are clear on where you stand. This is the safest way to avoid potential IR35 concerns.

 

What is the definition of a PSC?

The term ‘PSC’ was introduced by HMRC around the same time as IR35 came into force.  It is used primarily to describe the one person Limited Company type that many contractors have. Pre-IR35 Limited Company contractors were more or less automatically deemed to be ‘self-employed’ for tax purposes. IR35 changed this and all types of contractor have come under increasing HMRC scrutiny. The definition has been redefined over the years but generally agreed elements of a PSC are the following:

  1. You provided services for a client or clients.
  2. There was a contract between the client and the company of which you were a shareholder during the tax year.
  3. All or most (more than 50%) of the company’s revenue was earned through services carried out personally by the shareholders of the company.

If your business operation has all of these characteristics then it is most likely that yours is a PSC.

 

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.