On Tuesday the House of Lords debated a report, published on 7th April, regarding the increasing usage of personal service companies, their impact on the wider economy, and HMRC’s policing of their taxation through the controversial IR35 legislation.

Much of HMRC’s justification for the existence of IR35 is that it “protects” tax revenue – meaning without the rules in place there would be much wider “disguised employment” and hence lower tax yields. Tax revenue recovered directly from IR35 investigations has historically been low, so HMRC are under increasing pressure to provide justification for the legislation’s existence.

This issue of “protected revenue” has long been the subject of debate, and the Lords demanded more action from HMRC to prove they know the “true cost” of IR35. HMRC was also ordered to “take steps to provide better, clearer and impartial guidance to those affected by the provisions.” HMRC’s most recent attempt at IR35 reform – the Business Entity Tests – was met with widespread derision after it emerged the parties involved in their conception were at loggerheads over how they should be applied.

PCG, the independent organisation that represents freelancers and contractors – and has a seat of the influential IR35 Forum – welcomed the Lords’ strong stance. Director of Policy and External Affairs Simon McVicker said:

“It was heartening to see so many members of the House of Lords reinforce their scepticism of HMRC’s cost and risk estimates when it comes to the impact of IR35. In particular, for Lord Myners to go as far as calling HMRC’s response ‘flimsy’ must be seen as a scathing indictment of the case put forward in defence of the legislation.

“HMRC were asked by the Committee to justify its figure of £550m as the total revenue protected by IR35. The calculation they have offered in their response is based on a series of assumptions, which is a particularly alarming admission given that this figure is the sole justification put forward for keeping IR35 in place.”

“There is clearly a cross-party consensus in the House of Lords on this issue and we look forward to the Government’s response to yesterday’s debate.”

Photo by Maurice