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IR35: Government’s Predictable Response

Government defensive of IR35

This week the government have responded to the damning report by a House of Lords committee on the use of personal service companies (PSCs). The original report focused particularly on IR35, with much criticism of HMRC’s handling of the legislation.

The Lords committee made 16 recommendations to improve both IR35 and the use of PSCs in general.

The full response can be viewed here.

Perhaps predictably, the Government accepted very few of these recommendations in their response, explaining away many of the points as being work already in progress.

They have, however, agreed to the following:

  1. The Government could ‘further clarify and amplify’ how the cost of IR35 is calculated.
  2. A merger of tax and National Insurance is still on the cards, although this is not a short term project.
  3. The ‘service company’ questions on the self assessment return and year end declaration (P35) will be fully reviewed and changed if necessary.
  4. HMRC will demonstrate that it is receptive to feedback from the IR35 Forum.

A particular bone of contention – and the Government’s fundamental reason for keeping IR35 – is the potential cost to the Exchequer of abolishing IR35 altogether.

It is the Government’s view that, if IR35 were removed, there would be a mass migration of workers from PAYE and umbrella positions to limited companies.

They have estimated that around 55,000 employees earning over £50,000 a year would incorporate limited companies. They also believe that around 220,000 directors would ‘change their behaviour’; i.e. increasing the level of dividends they paid themselves.

Ultimately the Government have predicted that this would cost the Exchequer around £550m.

However, they have stressed that it is very difficult to estimate both the behaviour of workers and the potential financial impact. They have also agreed to provide an ‘administrative impact assessment’ in autumn 2014 which will detail the administrative cost of IR35 to the taxpayer.

It is clear from the Government’s response that they are defensive of the IR35 legislation and there is nothing to suggest that they are considering any significant changes. 

By Seb Maley

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3 thoughts on “IR35: Government’s Predictable Response”

  1. Mark Pipe

    Indeed a predictable response. The idea of pushing things through a committee just seems to be a delaying tactic in an election year. The government know that whichever way they jump it will cost votes and the committee justifies them doing nothing at the moment. Ultimately once an election is out of the way they will do what they like. It would be easy to change the system to something that is fairer but by their own admission they are making money out of the uncertainty.

  2. Tom

    Is there any way of reminding this Government that it is on record (Hansard)that when Labour brought IR35 in the Conservatives thought it would be harmful to the nations ability to provide a flexible work force and further, they thought it manifestly unfair and PROMISED TO REPEAL IT…. that moved to PROMISING to review it…..that has now moved to defending it !!!

    It’s nice and reassuring to know that politicians never change and they can always be trusted to not be trusted.

  3. Justin

    If IR35 were to be reformed such that the supposed employer paid the employer’ NI and the supposed employee paid the employee’s NI, then the situation might make a little more sense.

    But of course then the government would be fighting people who have in-house lawyers…

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