Government responds to PSC Committee report

The government has responded to the 16 recommendations made in April by the Personal Service Companies (PSC) Committee.

The committee’s recommendations, and the most pertinent parts of the government’s response to each of them are as follows:

PSC Committee recommendation 1:

We recommend that Her Majesty’s Revenue and Customs carry out and publish a detailed assessment of the current Exchequer protection figure and of the costs that taxpayers incur in dealing with IR35. This should enable a better assessment of whether the legislation is having the intended effect and is proportionate.

The government’s response:

The Government is confident that the figure quoted for Exchequer protection from IR35, and the methodology used in the calculation of that figure, is robust.

However, the Government acknowledges that it could further clarify and amplify how IR35 figures have been calculated. Accordingly, appended to this paper is a note: Estimating the cost of abolishing IR35, which provides a more detailed analysis of the figures previously submitted to the Committee by HMRC. As this is not a new Budget Measure, the costing has not been scrutinised by the Office for Budget Responsibility (OBR).

HMRC will publish during autumn 2014 an updated administrative impact assessment note setting out the current administrative costs which taxpayers incur in dealing with IR35.

HMRC will continue to work with stakeholders, in particular through the IR35 Forum, to identify how it can further streamline the operation of IR35 and support contractors to operate it correctly

The Government remains firmly of the view that the fiscal risk to the Exchequer of those incorporating to disguise employment income is significant. That view is based on the costings set out in the attached note.

PSC Committee recommendation 2:

Whilst we recognise the complexities in merging income tax and National Insurance and the effect that this may have on the contributory principle, we recommend that the Government re-examine the longer term case for combining taxes on income and National Insurance.

The government’s response:

The Government has looked at ways in which income tax and National Insurance could be more aligned. However, since employers are already adjusting to a significant number of reforms to payroll systems, the Government will wait for further progress on planned operational changes to the tax system before re-examining the operational integration of income tax and National Insurance.

PSC Committee recommendation 3:

We recommend that Her Majesty’s Revenue and Customs look again at whether they require complete and accurate responses to the “service company” questions on the personal tax return SA100 and the real time information employer year end declaration (formerly P35).

The government’s response:

Working with stakeholders, HMRC will undertake a full review of these questions on the personal tax return (SA100) and RTI end of year declaration: their form, purpose and clarity, with a view to making any necessary changes at the earliest practicable date.

PSC Committee recommendation 4:

If Her Majesty’s Revenue and Customs decide that they need the information from those questions, we recommend that their completion should be made compulsory, backed up by the potential for penalties to be charged for incorrect answers or non-completion.

The government’s response:

See response to recommendation 3

PSC Committee recommendation 5:

If Her Majesty’s Revenue and Customs retain the questions, we recommend that they revise the guidance notes accompanying the personal tax return SA100 and the real time information year end declaration by employers to make the relationship to IR35 clearer.

The government’s response:

See response to recommendation 3

PSC Committee recommendation 6:

If Her Majesty’s Revenue and Customs decide that they do not need the information gained from the questions, we recommend that the questions be removed from the tax returns and declarations.

The government’s response:

See response to recommendation 3

PSC Committee recommendation 7:

We recommend that Her Majesty’s Revenue and Customs articulate with greater clarity the costs they incur from IR35 compliance efforts and administration, and the relationship between those costs and the overall yield gained from the legislation.

The government’s response:

As with all HMRC’s compliance activity, the number of investigations into employment status and various types of intermediaries, including personal service companies, is kept under review. HMRC will consider the number of investigations into employment status and intermediaries as part of the wider review.

PSC Committee recommendation 8:

We recommend that the Contract Review Service be publicised to greater effect, that Her Majesty’s Revenue and Customs investigate ways to encourage individuals to use the service and that they look into ways to bolster confidence in its independence and impartiality.

The government’s response:

The IR35 Forum was set up in 2011/12 as part of a wider review by HMRC of the administration of IR35. Working with HMRC, the Forum is now looking at how the revised administration arrangements have worked and what further improvements can be made.

That work includes a review of the Contract Review Service; its use and barriers to its use, and will report and make recommendations to the IR35 Forum during 2014. The Committee’s recommendations will be considered by HMRC as part of this review.

HMRC acknowledges that the IR35 guidance can be improved. A comprehensive review of the guidance has taken place during which HMRC worked closely with stakeholders to understand user needs. The new guidance will be published shortly. HMRC is committed to keeping the guidance under review to ensure that it remains up to date and responsive to user needs.

PSC Committee recommendation 9:

We recommend that Her Majesty’s Revenue and Customs undertake a full consultation on how the Business Entity Tests could work better to provide greater certainty for taxpayers.

The government’s response:

The Business Entity Tests forms one strand of the wider review of IR35 administration referred to. HMRC is working on this strand with members of the IR35 Forum to gauge the use and impact of the Business Entity Tests and will report and make recommendations to the IR35 Forum during 2014.

PSC Committee recommendation 10:

We recommend that Her Majesty’s Revenue and Customs go to greater lengths to demonstrate that they are receptive to the feedback that is provided through the IR35 Forum and that they review the breadth of membership.

The government’s response:

HMRC is committed to working with the Forum, values the feedback the Forum provides, and will look for further ways to demonstrate it is receptive to this feedback. HMRC is also looking at membership of the IR35 Forum as part of the wider review of IR35 administration and will report and make recommendations to the IR35 Forum during 2014.

PSC Committee recommendation 11:

We recommend that the Government should develop and publish a short guide setting out the basic differences between employment and self-employment. The guidance should be published across multiple platforms, including both digital and paper, and should be made available to individuals working in all industries where intermediaries are prevalent.

The government’s response:

HMRC has recently updated its guidance on employment status, and provides an Employment Status Indicator tool, both of which are accessible online. Two factsheets (ES/FS1 Employed or self-employed for tax and National Insurance contributions? and ES/FS2 Are your workers employed or self-employed for tax and National Insurance contributions?), are also available online.

HMRC will continue to work with the Department for Business, Innovation and Skills to review how worker awareness can be raised and cross-governmental guidance can be further enhanced, updated as part of the planned transition to gov.uk, and more widely disseminated.

PSC Committee recommendation 12:

We recommend that the Government includes within the remit of the Low Pay Commission a consideration of the use of personal service companies and umbrella companies by lower-paid workers, and the implications for pay, employment rights and statutory entitlements.

The government’s response:

The Low Pay Commission’s goal is to recommend levels for the minimum wage rates that will help as many low-paid workers as possible without adverse impact on their employment prospects. The remit of the Low Pay Commission for 2015 will be published over the summer of 2014.

PSC Committee recommendation 13:

As it is clear from the evidence that abuse of the expenses dispensations operated by umbrella companies is taking place, we recommend that Her Majesty’s Revenue and Customs ensure that enforcement action is taken to end these abuses and to ensure that expenses dispensations are managed correctly.

The government’s response:

The circumstances in which HMRC is obliged to grant a dispensation are set out clearly in legislation: HMRC must grant a dispensation where it is satisfied that the expenses to be paid under that dispensation would qualify for tax relief. As part of the wider review of how HMRC can most effectively ensure compliance with employment taxes through the use of intermediaries…HMRC will consider how to tackle non-compliance by umbrella companies. This will include the misuse of dispensations.

PSC Committee recommendation 14:

We also recommend that Her Majesty’s Revenue and Customs should review its processes for granting and renewing expenses dispensations, in order to ensure that potentially high risk organisations are granted dispensations only when appropriate.

The government’s response:

At Budget 2014 the Government announced that it would be consulting on the Office of Tax Simplification’s recommendation that the dispensations regime should be replaced with an exemption for qualifying business expenses to reduce the administrative burden on employers paying expenses and to give them a greater degree of flexibility.

As part of that consultation, which is due to take place over the summer, the Government would like to better understand how any reform would affect particular industries, business models and types of organisations.

PSC Committee recommendation 15:

We recommend that the Government carry out an assessment of the extent to which off-payroll engagements are used elsewhere in the public sector, including by those earning less than £58,200 per annum.

The government’s response:

The review [of May 2012 into the tax arrangements of public sector appointees, carried out by the Chief Secretary to the Treasury] went further in requiring that departments should determine whether it was appropriate to seek assurance from individuals earning less than £220 per day or who had been engaged for less than six months. Departments are free to take a risk-based approach to all such appointments, and are not required to seek assurance on those appointments they regard as low-risk. This is a proportionate and cost-effective way of managing this process.

PSC Committee recommendation 16:

As the guidance embodied in Procurement Policy Note 07/12 currently appears to be applied inconsistently across departments, we recommend that Her Majesty’s Treasury take a leading role in ensuring consistency of application and that it should go to greater lengths to monitor the implementation of the Procurement Policy Note 07/12 guidance across Government departments.

The government’s response:

Cabinet Office and HM Treasury have published guidance on the assurance process and required departments to detail their implementation of these recommendations in their end of year accounts. HM Treasury released a review of compliance with these recommendations in March 2014.

HM Treasury's March 2104 review review found that departments sought assurance on the tax affairs of 1,940 of their contractors, and received satisfactory assurances from 1,815 of these engagements. In 125 cases contracts were terminated or came to an end before assurance was received. Where this occurred, departments have since referred all individuals to HMRC and this intelligence has been considered as part of HMRC’s wider risk assessments.

Local Government and the Devolved Administrations are outside the scope of MPM. However, the Secretary of State for Local Government wrote to the Local Government Association to highlight the issue and has published guidance which makes clear that local authorities should actively review their approach to the remuneration of senior appointments. The Chief Secretary to the Treasury has written to the Devolved Administrations in similar terms.

 


Jun 11, 2014
Email this article
Printer friendly page

Previous Page


Freelance Alliance
Freelance Alliance
What is Freelance Alliance?
Freelance Alliance