Many freelancers at the lower-end of the pay scale who use personal service companies have “no idea about IR35” and the “enormous financial consequence” of being caught by it.
The view of Kate Cottrell, co-founder of employment status firm Bauer & Cottrell, was sounded on Monday in her evidence to the Personal Service Companies Committee.
But in contrast to workers – the ones who “take the risk” of IR35 – the engagers are let “off the hook,” as they are “absolved” of their tax obligations if the rule is found to apply, the committee heard.
Seeming to add to their plight, workers using PSCs since May last year have been confronted by “another layer of complication” in an already complex area, said Ms Cottrell, pointing to the Business Entity Tests.
On the committee, Lord Levene reflected that, despite BETs being deployed to improve IR35, the rule is “a solution which has been drafted where nobody has actually worked out what the problem is.”
Compounding the problem is the tax authority’s website – which could assist the “lots of people” unsure about IR35 - because it is overly geared towards employees and employers, Ms Cottrell said, with too little focus on workers who are neither, or both.
HM Revenue & Customs came in for further criticism when, citing data from the department, the ICAEW’s Frank Haskew submitted that only 0.1 per cent of the estimated IR35 population is being investigated.
So despite a four-fold rise in the number of IR35 investigations – a fact which wasn’t mentioned to the committee – it was told that there are “a very small number of investigations” into a “very large number” of potential targets.
In particular, given that there are 800,000 one-person companies; set against just 40 HMRC staff who are tasked with launching about 250 IR35 investigations a year, Mr Haskew said that IR35 looked “unpoliceable in its current form.”
However at the close of the evidence session enforcement activity sounded stronger, as the Revenue was said to be monitoring dividend levels drawn by PSCs (which must declare their dividend total on page five of their self-assessment returns), as part of the department’s policing of the rule.