Following the publication of a highly critical House of Lords report into HMRC’s policing of the troublesome IR35 legislation, industry body PCG has called for its immediate suspension.

The report criticised HMRC’s enforcement of the disguised employment rules, in particular the ineffectiveness of the Business Entity Tests – the process freelancers and contractors can use to “self-certify” their IR35 status – introduced last year after a torrid development process.

The Lords also poured scorn on the taxman’s assumption that revenues from IR35 total some £550 million per year, and asked for publication of figures to back up this claim. This could prove a tall order for HMRC as a relatively small amount is recouped from IR35 investigations – the majority of HMRC’s assumed IR35 income is in the form of “protected” revenue – tax contractors would avoid if the IR35 gun was not pointed at their head.

The Lords report recognises the opposing forces at work in the UK contracting market, calling the self-employed “a feature of the modern British workforce,” policed by rules which generate “considerable hostility” and which “demand a great deal of time and effort on the part of contractors [to understand].”

The report recommends the Government re-examines the merging of National Insurance Contributions and Income Tax – this simplification would eliminate the need for IR35 and other complex legislation. Although PCG has taken the report as an opportunity to call for the suspension of IR35, the report itself recommends the opposite, saying:

“We believe that the abolition or suspension of the IR35 legislation […] would be unwise if the legislation has the Exchequer protection effect claimed for it by Her Majesty’s Revenue and Customs.”

PCG’s Chris Bryce commented on the publication:

“PCG has repeatedly asked HMRC to justify the £550m figure and the so-called ‘deterrent effect’ but HMRC has been unable or unwilling to do so. It is now clear from the findings of the House of Lords Select Committee that the effectiveness of this legislation and the justification for its continued existence is built on smoke and mirrors.

“We are calling for IR35 to be suspended while proper consideration is given to its abolition. Removing this unnecessary legislation will allow the UK’s flexible workforce to do what they do best – boost British business. The Government has refused to listen to the cries for help from the hundreds of thousands of contractors, freelancers and independent professionals blighted by IR35, but they cannot ignore the findings of the Committee.”

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Photo by Oliver Quinlan