Govt personal service companies response brings stability for contractors

Thursday 12 June 2014

The government has released its response to the findings of the House of Lords Select Committee on Personal Service Companies and it seems there will be little change to IR35.

For Brookson, this means there will be some stability for contractors after months of uncertainty.

"The government recognises that many individuals choose to work through their own limited companies; sometimes referred to as personal service companies, and appreciates the positive contribution to the economy of those who choose to work for themselves," the response said.

"However, people can also use intermediaries to disguise what would otherwise be employment income. The IR35 legislation seeks to ensure that what is properly employment income is taxed as such and tackles tax and National Insurance avoidance through the use of intermediaries."

Nevertheless, the government did acknowledge that IR35 needs to have better enforcement and administration.

HM Revenue and Customs (HMRC) accepted that IR35 brings with it certain hostilities, especially from those genuinely conducting business through their personal service companies. Indeed, many from this group consider the legislation to be "unnecessary and intrusive".

To solve the problem, the government has pledged to "work with the IR35 Forum to seek to raise contractors' awareness of IR35". HMRC will also endeavour to change perceptions that it is targeting those who are genuinely operating through personal service companies.

Meanwhile, it has been acknowledged that compliance is difficult for those contracting through personal service companies to define their tax and national insurance position quickly and accurately. This is because of the contract-by-contract style of IR35.

Carl Henning, senior solicitor at Brookson Legal Services, said: "IR35 is complicated for many contractors and you need a good understanding of case law to remain compliant. At Brookson we're happy that the government has acknowledged the shortcomings of how it is currently applied and enforced."

Martin Hesketh, managing director of Brookson, added: "When it comes to IR35 it's a case of better the devil you know. It was good to hear that the HMRC sees the value of self-employed workers and the legitimacy of personal service companies as a way of working. For Brookson, this suggests that the messaging around the flexible workforce and its value is getting through and gaining the recognition it deserves."

Analysis of the government's response indicates that in the short term any change to IR35 is unlikely. Replacing IR35 with a new approach would wash aside over 14 years of legal precedent, so keeping it clearly creates greater stability for the sector.

With the same official position given at the OTS and the House of Lords Select Committee, it seems a line has been drawn under the issue.

The government made clear that the abolition or suspension of IR35 legislation may be attractive but it will be an ill-advised move if the Exchequer has the protection of HMRC.

The government remains committed to lowering the instances of tax avoidance by targeting areas where this behaviour is prevalent. This will be key to leveling the playing field and making the tax system fairer.

By Victoria McDonnell

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