Freelancers who read the report by the Personal Service Companies Committee will see that there are no really nasty surprises for PSC users, but a lot of ‘ifs’ and ‘buts,’ writes Kate Cottrell, co-founder of IR35 advisory Bauer & Cottrell.
Well, reports should only be based on evidence but when the fundamental evidence -- HMRC’s deterrent figures in this instance -- are held to be in doubt, then the report can only be a series of ifs and buts.
So the Lords are saying that if the figures are accurate then, and only then, can HMRC establish if IR35 is proportionate and effective. And if HMRC’s figures are accurate then the Lords call for improvements to:
- tax returns’ service company questions and guidance notes,
- the imposition of penalties on taxpayers for incorrect answers on returns,
- HMRC guidance notes,
- HMRC’s Business Entity Tests,
- HMRC’s compliance resources, and
- Membership of the IR35 Forum and HMRC’s ability to listen to Forum members.
Many of these recommendations are already works in progress under the current review of the new HMRC IR35 processes, such as the revised IR35 guidance, which has been completed but is being held up with the move to the .gov.uk website.
But if HMRC’sfigures are not correct then it is not clear from the report how the Lords see the future, especially how to protect the low-paid vulnerable workers they have highlighted as a major issue.
However, we must not overlook the buts .The key buts are -- don’t move the IR35 liability to the end-client and don’t suspend or abolish IR35 if HMRC are correct, but do look again at merging NIC and tax.
The Lords have also highlighted on the one hand the growth in PSCs and the value of the flexible workforce but on the other hand, that individuals are still taking a risk with IR35 owing to the lack of visible compliance activity by HMRC.
Freelancers and other temporary workers operating via umbrella companies should keep watch on developments too, especially regarding expenses and dispensations following abuse highlighted in committee’s report. And the Lords’ recommendation to extend the ‘off-payroll’ assurance processes to all pay levels across the public sector should also be a warning to those currently ignoring IR35.
So now we have to await the government’s response to the report. But on the basis that past policy decisions have been made on HMRC’s analysis of the extent of the deterrent effect of IR35, then freelancers should not hold their breath on the abolition or suspension of IR35 just yet.
Editor’s Note: Further Reading -