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:
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.