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Lords inquiry lobbies for IR35 reform

7th Apr 2014
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Having identified that small business taxes act as an incentive for incorporation, the House of Lords personal services companies (PSC) committee said the government should consider combining income tax and national insurance contributions. Andrew Goodall reports.

The IR35 rules are intended to ensure that people providing services through intermediaries pay the same income tax and NICs as someone employed directly, if their arrangements amount to “disguised employment”.

But IR35 raises its own problems, said committee chairman Baroness Noakes at the end of an inquiry that began with a leading expert describing the regime’s contract-by-contract approach as “innately clumsy”. That approach can make the rules “especially cumbersome”, the committee said, and compliance requires “a sound understanding of case law”.

Many individuals “simply take a risk” that HMRC will not examine their employment status – an attitude that was “fostered” by a decreasing number of compliance investigations. Guidance for those affected “must be improved” if IR35 is to be maintained, the committee said.

Concluding a four-month investigation, today’s report found “considerable hostility” to the regime among contractors, and called on HMRC to do more to show that revenue protection provided by IR35 outweighs the cost of the legislation.

The report also recommended changes to the business entity tests, improvements to HMRC’s contract review service and a review of the membership of HMRC’s IR35 forum.

PCG, representing freelancers and contractors, called for the suspension of IR35 “while proper consideration is given to its abolition”.

CEO Chris Bryce, responding to the report, said removing the “unnecessary” legislation would allow the UK’s flexible workforce to “do what they do best – boost British business”. Bryce had told the committee that 84% of PCG members incorporate for non-tax reasons, including “limited liability, credibility in some industries and the ability to negotiate contracts”.

The committee raised concerns about lower paid workers engaged through structures that avoid a direct employment relationship. “The impetus for operating through a company can come from the engager, rather than the individual,” it noted.

The engager is not liable to pay employers’ NICs and does not have to provide employment rights. The ICAEW cited the broadening scope of employment law and new entitlements for employees as “driving the growth of PSCs”.

Responding to the report, an HMRC spokesperson said: “Many PSCs are used for genuine commercial purposes, supporting labour market flexibility, but the report also recognises that some are used for tax and NIC avoidance, underscoring the continued importance of the IR35 rules. We will continue to work closely with stakeholders such as the IR35 forum, to make the rules easier to operate in the interests of the majority of taxpayers who play by the rules.”


The committee concluded that serial contracting is “a feature of the modern British workforce” and is supported by both businesses and contractors. “We heard that although IR35 is not a significant issue for businesses, it can arouse considerable hostility from contractors.”

Several witnesses regarded the legislation as ineffective. Contractor Calculator said: “It does seem somewhat wasteful having industry experts and HMRC standing around a dead horse discussing how they can make it win the race. It’s a non-runner, and has been since inception.”

In contrast, G4S plc, Amey plc and Oil and Gas UK were supportive. “Various parties from the business sector” told the committee “very clearly” that the status quo should be maintained. But it was less clear, the committee observed, “whether this was an objective assessment of the situation or simply an appraisal of how the current rules are beneficial for their current business models”.

Amey plc told the committee that “a lot of administrative structures are built around permanent employment that are simply not appropriate for somebody who is only going to be in the business for three or six months”.


The committee recommended that HMRC:

  • articulate with greater clarity the cost of IR35 compliance work and administration, and the relationship between those costs and the overall yield
  • publicise the contract review service to greater effect and consider how to increase confidence in its “independence and impartiality”
  • consult on improving the business entity tests to provide greater certainty
  • review the breadth of membership of the IR35 forum and “go to greater lengths” to demonstrate that HMRC is “receptive to the feedback that is provided through this group”.

The committee said abolition or suspension of IR35, whilst attractive, would be “unwise if the legislation has the exchequer protection effect claimed for it by HMRC”. But it cast doubt on HMRC’s estimates and called for “more robust work”.

A second article will examine the committee’s call for “more robust work” in assessing the revenue protection offered by IR35. In the meantime, do you think peers have made a useful contribution to the IR35 debate? Please share your thoughts below.


Replies (29)

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By johnjenkins
07th Apr 2014 09:45

When oh when

will the powers that be realise it is not up to HMRC to decide employment status. It is up to the work giver and the worker.

IR35 comes up against that principal so that's why it hasn't worked.

The OTS and now the Lords want it abolished but it won't go. It will just sit on the statute books and fester. Why? simply because HMRC will not admit that it is not their god given right to decide employment status.

There is no such thing as disguised employment. You're either employed or not. There is nothing artificial about self-employment in whatever guise.

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Replying to Red Leader:
By GazCol
07th Apr 2014 10:04

The whole reason why we have IR35 in the first-place is to prevent situations, such as the BBC and HMRC themselves (!) letting employees go on a Friday and re-engaging with them through a Ltd company the following Monday to reduce their own costs associated with employement. Nothing more, nothing less - and that's as far as the scope of IR35 should go. Instead, it has been manipulated into something far above and beyond what it was ever intended to resolve.

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By ireallyshouldknowthisbut
07th Apr 2014 10:40


Well they got two things right (1) its mainly about NI avoidance. and (2) most contractors just seem to cross their fingers and hope it doesn't apply.

Or take a risk based approach to compliance as is the formal wording.



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By tonyleigh
07th Apr 2014 12:09


In 10 years of contracting pre-IR35, I only ever came across one person who left permanent employment and then went contracting with the same company. If IR35's purpose really is to stop this (it isn't, of course), it seems to me it's a solution to a non-problem. IR35's real purpose was to stop contractors paying themselves dividends free of NI, but rather than do this by some simple means (e.g. dividends paid to shareholders who were also employees of closed companies should be subject to NI, or a supplemental tax at the same rate as NI), HMRC and the Labour government introduced the cack-handed employment status tests we have today. The sooner IR35 goes, the better.

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07th Apr 2014 12:31

I think

 I think GazCol is completely right . How about the many larger organisations that refuse to take on anybody unless they operate through a limited company. Saving that company the employers NI, sick pay and holiday pay obligations. There is obviously some NI benefit to the contractor but if caught by IR35, it is still the 'big boy' escaping normal employment obligations while the 'little guy' gets the bill.

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By ringi
07th Apr 2014 12:47

Removing IR35 would send a signal that anybody could avoid having to pay NI by using a LTD, so we can expect that the usage of limited companies for “workers” would be a lot more than before IR35 come in.  (IR35 made a lot of people question way they were not doing the same to start with.)

The only sensible option is too combine NI with Income Tax and put up the state pension so that retired people don’t lose out too much.

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By Nebs
07th Apr 2014 12:58

Keep IR35, but put the NI bill on the main employing company to be paid to HMRC at the same time as PAYE payments.If you pay someone who you "employ" through a Ltd company then you pay the company net of employees NIC and pay this over to HMRC on the monthly payroll together with a further payment equivalent to employers NIC. The tax will take care of itself.

The big firms are likely to be much more compliant, it will be much easier for HMRC to do checks, and the company that receives the payment can get a credit for the NIC that they can use, without the opportunity to carry forward to another tax year, if they choose to pay any salaries above the NIC threshold.

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By raybackler
07th Apr 2014 13:05

Dead horse

I wonder at legislators at times.  They have created a dead horse that will never win, as quoted above.

We have a situation where the self employed pay 9% NI and close company directors don't pay any.  I am certain that more tax would be raised if close company directors were required to pay NI at the same rate on salary and dividends.  They are taking similar risks with their livelihoods.  How about phasing it in over three years at 3% per annum to give time for it to feed through into contracts?

Close company director's NI would put up the costs of employing contractors and make it less attractive to avoid employing people.  IR35 is a disaster, because it is trying to force employment.  Employers don't want to use the self employed because of the easier challenges to employment status from the self employed.  They want limited companies to be inserted into the relationship, because it cuts out the nonsense of industrial tribunal threats.

It is true that employers are saving employers NI, but they don't want a permanent employee, when workload demands a temporary contract.  The whole point of a flexible workforce is to drive forward economic growth in a cost effective way.  Whether that flexible workforce is self employed or operating through a limited company, it should not affect employers and it should not alter the tax/NI take either.


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By nickygl
07th Apr 2014 13:08

IR35 isn't working. I recommend removing IR35 and instead implementing controls on the larger companies to ensure that they use contractors appropriately rather than as pseudo-employees.

The contractors that caught by IR35 have the unfortunate situation of being taxed as an employee but have no legal rights as an employee so are massively penalised.

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By Lutondata
07th Apr 2014 13:09

Best comment so far!

Well they got two things right (1) its mainly about NI avoidance. and (2) most contractors just seem to cross their fingers and hope it doesn't apply.

Thank you I reallyshouldn`thave  You have summed it up in a sentence!

Although in fairness a lot of agencies/clients will only deal with limited companies as they want an arms length relationship.

Even so, if a contractor is working through a limited company there is no reason not to put £25k through a paye salary.  I have enough of a job convincing them to accept putting through £1000 a month!  For those that insist on being "Tax efficient" and skating on the threshold I wish they would [***] off.  Why don`t they walk around with a placard saying "Please investigate me.".  I turnover 80k but put through a salary of £9440




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By justsotax
07th Apr 2014 13:17

If the government of the day

had had balls...they would have stuck to the original plan - which was that the contracting firm had to decide whether the contractor was employed/self employed...and was therefore liable if they got it wrong.  Of course, IR35 is completely side stepped if you are a sole trader...(and liability falls on the contractor) which of course is the reason why these big firms insist that you can only be a Ltd

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By sherodwilliams
07th Apr 2014 13:21

Big Company Benefits maybe but not all it seems to be

 I can understand most of the comments being made by contributors but a set of circumstances that I have come across increasingly is where organisations have employed people in highly specialised roles for a period of time and for numerous & varied reasons they have not trained successors into the role. Upon retirement of the individual, the firm manages for a few months before calling upon the retired worker for help. At that point, the worker is personally no longer liable for EE's NIC but the company does not want to re-hire on an employment contract because the worker is now more likely to be ill as they grow older ( A generality ) Also employment law is to a degree stacked against the firm. So they have the retired individual form a small limited company which pays tax at 20% - the same rate as the worker would ordinarily pay as Income Tax. The fact that he can then draw dividends should be irrelevant and the fact that that there is no employees nic is also irrelevant. The company of course contributes no Er's NIC  but arguably this makes the company more competitive?

At a macro level The Government wants us to be more price competitive but then also wants us to incur costs which make us less so The whole scenario of IR35 is at best a Dogs Breakfast. It needs a steer on the whole principles of what we are seeking to achieve as a productive nation

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Dave Chaplin
By Dave Chaplin
07th Apr 2014 13:31

IR35 is dead, but not yet buried

johnjenkins is spot on - HMRC should not have the power to interfere with the freedom to contract. Those of us in our forties will remember what happened in the IT industry in the late '90's. There were scores of us who had been programming since we were kids (who fondly remembers the Sinclair Spectrum and Commodore 64?) and regardless of degree found ourselves being sucked into IT and getting paid fortunes by banks for cutting code. The traditional software houses lost many of their employees to contracting (I was one) who now had a way (via the internet and Jobserve) to cut out the middleman. And with the kinds of rates on offer pretty much everyone did. Permie IT programmers in those days were rare. To keep their programmers, many employers saw little option but to allow them to convert to contractors. And that's why IR35 was invented.

15 years later though the market is entirely different, and has been the same way for probably the last 10. The whole Monday-to-Friday scenario just doesn't exist anymore. HMRC worked out years ago that trying to push IR35 onto contractors was near on impossible to do, so focused their efforts elsewhere and IR35 enquiries dropped. It's only when the IR35-fire got stoked again by the OTS and Osbourne that HMRC had to be seen to be "better enforcing" it. We'll, they tried, and are discovering for a second time that they are flogging the same dead horse.

I also agree with johnjenkins that IR35 will just sit on the statute books and just fester. But whilst IR35 may well continue to exist, going forward it's basically become a voluntary tax, only paid by the tax ignorant who don't put their IR35 ducks in a row.

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By dmmarler
07th Apr 2014 13:34


If NI were incorporated into income tax there would be no incentive on the worker to go for any situation where they had to go to a limited status other than for good business reasons (limited liability, insurance, genuine arms length contracts, etc.). So no problems with IR 35.

HMRC could then go for all large employers who have tried to force people into a limited company status for no reason other than to avoid Employers' NI, pensions, and other benefits to which a normal worker could be entitled.  They could start looking at all contracts in excess of one year with the same company/worker and make a mint in fines, interest, etc., at hardly any cost and a lot of shame to he corporates involved!

At the moment HMRC is targeting the individual contractor, and this is unhelpful as the cases are long and expensive (for both sides) and no-one comes out a clear winner/loser.  It is the large corporates (including public sector/HMRC) who are openly getting away with not treating individuals properly.

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07th Apr 2014 14:08

iR 35

A small client of mine was working for a firm under PAYE and was told by that firm that he would HAVE to register under an umbrella company. Having no choice he did so. 

However since he did so he is filling in time sheets and forwarding them and expense sheets.

Subsequent payment advices show;

1 Having expenses deducted from his gross salary

2 Having tax and NI calculated on this figure

3 Having his expenses added back onto this figure to give him his net income.

In the interim he is having both employer's and employees National Insurance deducted from him, and since tax and NI are being calculated on the amount with expenses deducted the true amount due is not being received by HMRC.

I have written to HMRC several times about this, but they tell me that this method is correct.

I still cannot get it into my head how one man on his own (Not a limited company) can be due both sets of NI. Can anyone enlighten me?

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By the ins and outs
07th Apr 2014 15:20

Employer power

A big challenge here comes from the disparity in power between the employer and a potential employee/contractor. If the employer tells the employee/contractor they need to operate through a Ltd company then the employee has to do this if they want the job. For most people this is not a choice.

The advantages to an employer are not small  -  they remove all obligations wrt holidays, sick pay, pensions, training, stable working hours, employer's NI as well as reduce risks of being sued by employees for unfair dismissal, redundancy pay etc.

If I remember correctly HMRC treats the amount invoiced as being Net Pay and grosses this up to calculate the gross pay for tax and NI purposes. In other words the employee becomes liable for the employers NI and a higher burden of PAYE which they need to cover from what they have been paid - net pay. 

Finally it is far easier for an employing organisation to have the resources to assess whether something falls inside IR35 or not (and to challenge HRMC in court if necessary) than an employee.

So given that the advantages predominantly lie with the employer, doesn't it make sense for the employer to be the one HMRC goes after?

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By johnjenkins
07th Apr 2014 15:26

Since HMRC

couldn't make IR35 work and it would cost them more to take tax payers to court than they would receive, they have done "deals" with certain employers who use "umbrella companies". They seem to be based on what HMRC can get out of a bad situation. Unfortunately some workers fall for this scenario instead of setting up themselves properly.

Quite honestly, with the rules and regulations and EU crap, it really is not worth employing people for the small entity. Why do you think the government are giving up to £2k  towards employment? They know what the score is and it's nothing to do with "we want to help".

There is a lot of opposition to "one man bands" and I seriously think there won't be many of us left in the next 10 years. That is unless we come out of the EU.

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By pturner.aims
07th Apr 2014 15:32


I think that IR35 is one of the main drivers of tax avoidance schemes. HMRC would probably find that tax revenues went up significantly if it was abolished.

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By Shannock9
07th Apr 2014 17:18

Socialist dialectic

only allows for expoiter or exploited - no middle ground.  Thus Labour, and the EU who are 99% socialist, and  statist "conservatives" all hate contractors.  It's not that they "don't understand" but that we threaten their worldview.  Only by a rigorous deconstruction of the implicit socialist assumptions will contractors ever become first class citizens.  End of story.

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By Deputy Dawg
07th Apr 2014 19:13

Why have they still not combined tax & NIC?

Whatever happened to the plans to simplify the tax system?

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By Carl Barwick
08th Apr 2014 10:38


Who cares if people use companies to reduce their NICs bill? It makes sense to me.  If it sounds like blatant avoidance to other people, they should consider the facts more carefully.  If workers are prepared to give up employment protection rights and all the security of tenure that involves in exchange for greater flexibility of working, good luck to them.  As others have said, workers are either employed or not employed.  If they are not employed they can choose how to arrange their business affairs and that right should not be interfered with on the grounds that HMRC think there is a "correct" amount of tax for them to pay.  They are entitled to work via PSCs and the tax consequences that flow from that are enshrined in law.  All IR35 does is seek to replace that legal position with a notional fiction that is more to their liking.  That is not a sensible basis for a tax system and the more HMRC flog this particular dead horse the more ridiculous they appear.

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By adam.arca
15th Apr 2014 10:10

Let's be honest...

...there is a problem out there which IR35 is attempting to redress. Unfortunately, and pretty much par for the course for governments of all hues which allow themselves to be advised on tax matters by HMRC, the IR35 "solution" is hopelessly complicated and unworkable.

Of course big business will argue in favour of IR35 because it stops the whole Pandora's box of status issues being their responsibility. In the modern flexible economy, however, I do have to say I have a lot of sympathy for that view. But that shouldn't mean the problem should be passed down the line to the contractors who are even less likely to be able to properly tackle the issue.

Personally I don't see the merger of income tax and NI as the solution: that's a really big change. A better answer in my view would have been something more targeted like the re-introduction of close company apportionment. Or you could re-introduce a form of ACT so that there is a cash cost from dividends. Or reverse any one or more of probably a dozen or so changes which have gradually made small limited companies too tax-favoured and status-favoured as compared to sole traders.

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By johnjenkins
15th Apr 2014 11:47

@adam.arca No No No

No No etc.

You have missed the point entirely.

There isn't a problem out there apart from IR35.

It is not up to HMRC to decide employment status. There are no laws deciding employment status. What IR35 tries to do is totally unacceptable, probably illegal, and that's why it doesn't work.

There is no such thing as disguised employment (No I know you didn't mention it).

What do think is the MAIN reason for one man band limited companies? Well I will tell you it's to stop their property being taken away when they get shafted by the big boys (got nothing against big boys but they have the clout to do what they like).

End of.

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By adam.arca
16th Apr 2014 10:17


Thank you for your political contribution.

Certainly, if there were only the black and white choice of IR35 or no IR35, I would go with get rid. But, getting back to the real world of accountancy and realpolitik, that's never going to happen.

If you accept that reality but at the same time you believe (as I do) that IR35 is the wrong approach because of its scatter gun approach and disproportionality, then you have to consider a more targeted approach.

Oh, that will be what I said first time round.

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Dave Chaplin
By Dave Chaplin
16th Apr 2014 10:42

The notion of a disguised employee is nonsense

I agree with john. The concept of "disguised employees" was dreamt up by HMRC because there was a threat to the public purse from people deciding to work in a different manner.

To highlight how ridiculous the concept is we published an April Fools a couple of years ago titled 10,000 HMRC inspectors being hired to target ‘disguised businesses. The general premise was based on the idea that if for some reason it was more tax efficient to be an employee than a business then lots of one-man-band consultants would become "disguised businesses" when working for their clients. HMRC would want to crack down on the behaviour for the same reasons as IR35.

When you look at it in reverse in this manner it does highlight what nonsense IR35 is. HMRC have no right to decide people's employment status. It's up to people to have the freedom to contract and decide how to engage, then adhere to the tax laws and cough up what's due.





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By johnjenkins
16th Apr 2014 11:39


You have still missed the point.

The reality is that HMRC do not have a mandate to decide employment status. There is nothing to be targeted, so IR35 in whatever form cannot be real. Yes, of course the "bully boy" tactics have some success but that will always happen.

I think your view stems from HMRC's take on "some" one man band Ltd Co shouldn't be allowed. Please tell me why?

It really is time that our respective "bodies" stand up and say "enough is enough".

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By adam.arca
16th Apr 2014 14:07

No, John...'s you who's missing the point.

The Revenue may have driven the introduction of IR35 (I don't know that as fact but it has their cackhandedness all over it) but, correct me if I'm wrong, it is actually the law. And because of that fact, you can argue until you're blue in the face about how it is interpreted and whether that gives them the authority to decide employment status but in my opinion you're always going to be arguing from the weaker position.

And when I said that we would be better off with more targeted measures, I wasn't talking about contractors and / or one man companies and / or employment status, I was talking about the dichotomy between self employed taxation and limited company taxation which encourages this form of tax avoidance. Nor was I saying that it was wrong to seek to avoid tax in his way since it is perfectly legal at the moment (IR35 issues aside), rather what I was saying that this dichotomy is the area which ought to have been targeted when the political decision was made that this form of avoidance was unacceptable and that in my opinion at least any move to scrap IR35 would most likely result in alternative anti avoidance measures being put in place, possibly along the lines of the ones I floated.

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By johnjenkins
16th Apr 2014 14:44

Sorry Adam

but employment status is not tax avoidance and that's where you're missing the point. Taking away Limited Company status is against company law. Following from that logic, if Limited company status is taken away then the worker cannot be employed by their own company so they would either have to be self-employed or work for the work giver.

IR35 cannot decide employment status as there is no legal definition of said employment status. Contract for services make that abundantly clear.

However I do agree that there shouldn't be any difference in the rates of taxation.

I am quite happy with IR35 staying because to me and many others it is a totally useless piece of crap, but while HMRC are chasing their tails they are leaving others alone.

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By AndrewV12
09th May 2014 09:06

Carry on regardless

Good points above,lets face it most contractors have probably heard of IR35, but carry on trading as a sole trader / Ltd co regardless.

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