Understanding of IR35 rules 'improving', Lords told

PEOPLE’S UNDERSTANDING of IR35 is improving, but still requires significant development if the rule is to be adequately enforced and adhered to, the House of Lords Personal Service Companies Committee heard in its first sitting.

IR35 is designed to ensure people engaged for work through personal service companies pay the same tax as if they were directly employed.

There is no clear definition in law of what actually constitutes a personal service company, although it is generally accepted that limited liability companies with a sole director fall within the definition.

Appearing before the committee, HMRC’s deputy director responsible for employment status Rowena Fletcher told the enquiry, led by Baroness Noakes, that the current estimate for Exchequer risk posed by personal service companies is around £475m.

While she added understanding of the rule is increasing, her colleague Robin Wythe noted much of HMRC’s language is “anathema” to many taxpayers, making the department understood by wider population difficult.

A wider issue raised by Office for Tax Simplification director John Whiting is that companies and other employers engage people through service companies in order to protect themselves from PAYE liabilities.

There was controversy last year when it emerged the BBC employed 25,000 people who did not pay tax at source. The figure included about 13,000 on-air television and radio ‘talent’, with a further 12,000 off-air staff. About 3,000 were paid via private companies which could potentially have allowed them to reduce their tax liabilities.

There was also controversy when 2,000 senior office holders of public bodies were revealed to be receiving payment off-payroll.

The role of the legislation, Whiting added, is not to generate yields directly – noting it had yet to breach the £10m mark since its introduction – but rather to protect revenues for the taxman, a figure more difficult to quantify.

“The amount it’s brought in is relatively derisory”, he said. “It’s protected far more, though, and that’s much harder to measure.”