160 HMRC

HOUSE OF LORDS
Select Committee on Personal Service

Companies
Report of Session 2013–14
Personal Service
Companies
Ordered to be printed 31 March 2014 and published 7 April 2014
Published by the Authority of the House of Lords
London: The Stationery Office Limited

£13.50
HL Paper 160
The Select Committee on Personal Service Companies
The Select Committee on Personal Service Companies was appointed by the House of Lords on 12
November 2013 with the orders of reference “to consider the consequences of the use of personal
service companies for tax collection.”
Membership of the Committee

Baroness Bakewell of Hardington Mandeville
Baroness Donaghy
Lord Empey
Lord Higgins
Lord Hope of Craighead
Lord Levene of Portsoken
Baroness Morgan of Huyton
Lord Myners
Baroness Noakes (Chairman)
Lord Palmer of Childs Hill
Lord Stewartby
Lord Woolmer of Leeds (resigned 12 January 2014)
Declaration of Interests
See Appendix 1.
A full list of Members’ interests can be found in the Register of Lords’ Interests:
http://www.parliament.uk/mps-lords-and-offices/standards-and-interests/register-of-lords-interests/
Publications
All publications of the Committee are available on the internet at:
http://www.parliament.uk/personal-service-companies
Parliament Live
Live coverage of debates and public sessions of the Committee’s meetings are available at:
www.parliamentlive.tv
General Information
General information about the House of Lords and its Committees, including guidance to
witnesses, details of current inquiries and forthcoming meetings is on the internet at:
http://www.parliament.uk/business/lords
Committee Staff
The staff of the Committee were Patrick Milner (Clerk), Matthew Smith (Policy Analyst) and
Helena Ali (Committee Assistant).
Contact Details
All correspondence should be addressed to the Clerk of the Select Committee on Personal Service
Companies, Committee Office, House of Lords, London SW1A 0PW.
The telephone number for general enquiries is 020 7219 6612.
The email address for general enquiries is holsupport@parliament.uk
CONTENTS
Paragraph Page
Summary 5
Chapter 1: Introduction 1 7
Personal Service Companies: a growing phenomenon 1 7
The Committee’s work 4 7
Chapter 2: The use of Personal Service Companies, relevant
legislation and recent trends 12 9
Introduction 12 9
The use of Personal Service Companies 13 9
The growth of personal service companies: ‘push’ and
‘pull’ factors 22 10
The IR35 legislation 39 14
Subsequent changes to the legislation 51 17
Recent debate and proposals for reform 55 17
The OTS Review of Small Business Taxation 55 17
Autumn Statement 2013 and Finance Bill 2014 60 18
Chapter 3: The continuing viability of the IR35 legislation 65 20
Introduction and Background 65 20
The effectiveness of the legislation 74 22
The Call for Reform 80 23
Responsibility 90 25
Chapter 4: HMRC’s administration and the effect of
recent reforms 102 29
Enforcing the legislation 105 29
Taking the Risk 117 32
Recent reforms: The Business Entity Tests and the
IR35 Forum 124 33
Chapter 5: Implications for the lower-paid 141 38
Issues for the lower paid 150 39
Reduced entitlements 150 39
The issue of awareness 156 41
A role for the Low Pay Commission? 165 42
Expenses and enforcement 173 44
Chapter 6: The public sector 184 46
The principle of public sector use of personal service
companies 189 47
The limitations of the Treasury Review 196 48
Implementing the new guidance 213 51
Summary of conclusions and recommendations 54
Appendix 1: List of members and declarations of interest 57
Appendix 2: List of witnesses 59
Appendix 3: Call for evidence 62
Appendix 4: Glossary 64
Appendix 5: IR35 66
Evidence is published online at

http://www.parliament.uk/personal-service-companies
and available for inspection at the Parliamentary Archives (020 7219 5314)
References in footnotes to the Report are as follows:

Q refers to a question in oral evidence.
Witness names without a question reference refer to written evidence.
SUMMARY
___________________________________________________________________________________________________________________________________________________________________________________________________________________
The use of personal service companies has expanded significantly - a trend which
mirrors the wider growth of the flexible workforce. The motivation to incorporate
is not driven solely by financial incentives, although personal service companies
may offer a number of such benefits, including the opportunity to make tax and
National Insurance savings.
Concern surrounding the implications of the use of personal service companies for
the collection of tax and National Insurance has persisted for a number of years.
Legislation, often termed IR35, was much criticised in the evidence that we heard.
The provisions are complex, and rely on contract-by-contract assessment and a
sound understanding of case law to prevent abuse. This has driven the growth of a
significant industry of professional advisers and accountants.
Some witnesses called for the suspension or abolition of IR35. Her Majesty’s
Revenue and Customs (HMRC) told us that such a measure would put £550
million of revenue at risk. This figure is an estimate and was not, in our view,
directly substantiated by any publicly available information. Given that the
justification for maintaining the IR35 provisions relies almost entirely upon this
calculation of a deterrent effect, we believe that HMRC should publish a detailed
assessment to justify maintaining the IR35 legislation.
If IR35 is to be maintained, the guidance which is currently made available to

those affected must be improved. We recommend that HMRC undertake a full
consultation on how the Business Entity Tests could work better to provide greater
certainty to taxpayers. HMRC’s Contract Review Service needs to be improved; in
addition they should provide greater clarity as to the questions asked concerning
service company usage on annual tax returns. In addition, the membership of the
IR35 Forum should be reviewed.
We found that a significant number of lower paid individuals were engaged

through corporate forms, including personal service companies. We heard
concerns about the extent to which people were unaware of the potential negative
implications of working through a company, particularly the absence of
employment rights and entitlements, inadequate pension provision and exposure
to potential HMRC compliance investigations.
We recommend measures to build awareness of such matters amongst the groups

affected. We also recommend that the Low Pay Commission conduct a wider
review of the use of companies by lower-paid workers, and the implications for
pay, employment rights and statutory entitlements.
Finally, we found that the Government’s guidance on off-payroll engagements in

the public sector was being implemented inconsistently across departments, and
that the full extent of these engagements within Government was not yet known.
We recommend further measures to build confidence in public sector management
of off-payroll engagements.
Personal Service Companies
CHAPTER 1: INTRODUCTION
Personal Service Companies: a growing phenomenon

1. Patterns of working within the UK labour market have been changing for
some time. Freelancing has emerged as a preferred method of working for
many and as our report demonstrates, successive Governments’ attempts to
introduce and administer appropriate methods of tax collection have been
complex. Legislation first introduced in 2000, which came to be known as
IR35, has been amended and bolstered by supplementary measures over the
years in an attempt to respond to changing employment structures.
2. The term ‘personal service company’ is not defined in law. It is understood
generally to mean a limited company, the sole or main shareholder of which
is also its director, who, instead of working directly for clients, or taking up
employment with other businesses, operates through his company. The
company contracts with clients, either directly or through an agency, to
supply the services of its director. This is the general understanding with
which we approached our work.
3. The work of HMRC comes under particular examination in our report, as
does the viability of a legal construction which assumes that a clear
distinction between employment and self-employment can be made. We
heard a great deal about the benefits for British businesses and the wider
economy, though we also heard about the potential problems that can arise
when the lower paid are engaged through structures which avoid a direct
employment relationship. Following on from a previous Parliamentary
inquiry,1 we also received evidence discussing the use of personal service
companies in parts of the public sector.
The Committee’s work

4. In November 2013 the House appointed this ad hoc Committee to consider
the consequences of the use of personal service companies for tax collection,
and to make recommendations. The Committee’s timetable was unusually
short and its remit was accordingly closely defined. The Committee’s
membership is listed in Appendix 1.
5. From the outset it was clear that there were a number of discrete areas that
had to be examined if we were to grasp the complexity of the issues. Our Call
for Evidence was published on 20 November 2013 and attempted to cover
this range of issues. It can be found in Appendix 3. By January, when we
ceased to hear oral evidence, we had heard from 28 witnesses and received
44 pieces of written evidence.
6. The report is not intended to be a comprehensive reference work; instead it
focuses on five main areas:
1 Committee of Public Accounts, Off–payroll arrangements in the public sector (12th Report, Session 2012–13,
HC 532).
8 PERSONAL SERVICE COMPANIES
 The use of Personal Service Companies, Relevant Legislation and Recent

Trends (Chapter Two)
 The Continuing Viability of the IR35 Legislation (Chapter Three)
 HMRC’s Administration and the Effect of Recent Reforms (Chapter
Four)
 Implications for the Lower-Paid (Chapter Five)
 The Public Sector (Chapter Six)
7. As the inquiry progressed, it became clear that there was a general lack of
understanding of how widespread the use of personal service companies was
in the UK economy and of the complexity of the associated legislation.
Previous examinations have been carried out by the Office of Tax
Simplification (OTS) though as the bulk of the rules were only introduced in
the year 2000, there have been few comprehensive studies to date.
8. We were interested to discover that an entire industry has emerged as a result
of the IR35 legislation and that a simple internet search returns numerous
companies, publications and member bodies which exist to advise individuals
of their tax position, campaign for reform and report relevant developments
in the area as a whole.
9. Whilst many witnesses were very willing to contribute to our inquiry, we
were disappointed at the number of organisations and sectors which were
reluctant to engage. This was particularly true of representatives of the IT
and banking industries, which are commonly understood to be significant
users of personal service companies, though there were notable exceptions.
Consequently, it was difficult to ascertain how widely personal service
companies were being used across all sectors and industries.
10. We were surprised by the lack of co-operation from the Government. The
Exchequer Secretary to the Treasury, who has responsibility for tax matters
within Her Majesty’s Treasury (HMT), refused to attend an oral evidence
session citing that our enquiry was concerned with HMRC’s application of
the legislation. He also refused to allow Treasury officials to appear on the
same grounds. The legal framework within which HMRC operates clearly
affects the tax collection process and much of the evidence we received was
concerned with the problems created by the IR35 legislation itself, not simply
issues associated with its implementation. It was unfortunate that we were
not able to discuss these issues with a Minister before making
recommendations.
11. We are grateful to the Committee’s Specialist Adviser, Anita Monteith, for
her assistance and advice.
PERSONAL SERVICE COMPANIES 9
CHAPTER 2: THE USE OF PERSONAL SERVICE COMPANIES,

RELEVANT LEGISLATION AND RECENT TRENDS
Introduction
12. The use of personal service companies extends across a number of sectors of
the economy and has expanded significantly in recent decades. This Chapter
considers the reasons behind this trend, and provides an initial outline of
relevant legislation which has affected the use of personal service companies.
It concludes with a brief summary of recent initiatives undertaken.
The use of Personal Service Companies

13. In certain sectors of the economy—information technology and the oil and
gas sector in particular—it is a long standing practice for individuals to set
themselves up as personal service companies, providing their services as
consultants to clients, rather than working directly as employees.
14. Use of personal service companies extends into other sectors, where these
arrangements may be less prevalent but are still not uncommon. It is
certainly the case that many interim managers, in both the public and private
sectors, choose to work through personal service companies; the Institute of
Interim Management (IIM) estimated that there were up to 16,000 interim
managers in the UK providing their services on a freelance basis. They told
us that around 88% of these interim managers operate through their own
limited companies.2
15. Personal service companies have also been used by senior executives. In
February 1993 it came to public attention that the then Director General of
the British Broadcasting Corporation (BBC) was engaged through a limited
company and was not, therefore, a BBC employee.3 Public sector use of
personal service companies to engage senior officials came to the fore once
more in 2012, with the news that the Chief Executive of the Student Loans
Company was engaged through a personal service company. The
Government subsequently undertook a review of public sector use of
personal service companies and made a number of changes, implemented
through Procurement Policy Note 07/12.4
16. The trade association Oil and Gas UK told us that, in their area of work, it
was particularly common for individuals to deliver their work through
personal service companies, and that personal service companies had been a
feature of the labour market in the oil and gas industry for many years. They
suggested that in certain areas of operation, including engineering design,
construction and project management, more than 80% of personnel were
engaged off-payroll.5
2 IIM, written evidence. Interim managers are used to fill short-term management vacancies in both the
public and private sectors.
3 On 1 March 1993 the BBC announced that this arrangement had been changed and that the Director
General would henceforth be engaged as an employee.
4 See Chapter six.
5 This figure will include those engaged through other off-payroll arrangements, such as agency PAYE, as
well as those engaged through personal service companies.
17. Other sectors where the use of personal service companies is common were
identified during the course of our work; these included construction,
engineering, teaching and entertainment. We sought an indication of recent
trends in the use of personal service companies; robust figures on the overall
numbers of these companies are not available, although a number of
estimates were made.
18. HMRC estimated that the current personal service company population was
around 200,000. HMRC’s estimate for 1999, when the IR35 rules were first
suggested, was 90,000. HMRC explained that they “do not routinely
estimate the size of the personal service company population, because that
information of itself is not terribly useful for our operational compliance
activity. It is a pretty broad-brush estimate of a certain type of company”.6
19. Witnesses expressed some support for these figures. The Freelancer and
Contractor Services Association (FCSA), a body representing companies
who provide accountancy and other services to freelancers, suggested that
these figures were “broadly accurate”.7 The Institute of Chartered
Accountants in England and Wales (ICAEW) told us that the figure of
200,000 companies “would not seem at all unrealistic to us”.8
20. The Professional Contractors Group (PCG), a trade association representing
freelancers, was concerned that HMRC estimates were based upon a number
of assumptions, which were not publicly known. The IIM felt that estimates
did not appear to be underpinned by any statistical analysis. HMRC told us
that only 1,000 individuals had answered the service companies question on
their 2011–12 Self Assessment Tax Return (form SA100).9 This is some way
from the 200,000 estimate for the overall personal service company
population, although HMRC offered a number of potential reasons for non-
completion.10
21. Despite the lack of clarity surrounding the overall total of personal service
companies, the large majority of our witnesses felt that numbers had
increased over the past decade. John Whiting, Tax Director at the OTS, told
us that “The numbers have certainly gone up, however you look at it, over
the period that IR35 has been around”.11 Patrick Stevens, Tax Policy
Director at the Chartered Institute of Taxation, told us that “Certainly my
perception is that it has been steadily growing during the course of the last
five or six years”.12
The growth of personal service companies: ‘push’ and ‘pull’ factors

22. We were told of a number of potential tax advantages for individuals using a
personal service company. Firstly, the range of expenses which the personal
service company can set against its taxable profits will be wider than that
6 Q1
7 FCSA
8 Q 34
9 The question asks: “If you provided your services through a service company (a company which provides
your personal services to third parties), enter the total of the dividends (including the tax credit) and salary
(before tax was taken off) you withdrew from the company in the tax year”.
10 Q 118
11 Q 13
12 Q 34
which an employee can set against his or her taxable income.13 Secondly,
there may be a cash-flow benefit in avoiding tax being deducted at source
under PAYE each month. Thirdly, it may be possible for individuals to retain
within the business any earnings which are not immediately required as
income, reducing tax liability through the application of corporation tax or
capital gains tax.
23. In addition, the individual may be in a position to receive dividends out of
the company, instead of receiving a salary, and this could eliminate his or her
National Insurance liability. It is possible to qualify for benefits whilst paying
no National Insurance contributions. Individual contractors who pay
themselves a salary from their personal service companies between the lower
earnings limit and the ‘primary threshold’ (£109 and £149 per week
respectively in 2013–14) will not pay employee National Insurance
contributions but will still be treated as a contributor.14 Similarly, there are
no employer contributions on earnings below the secondary threshold, which
is currently £148 per week (2013–14). It is, therefore, possible to draw a
salary of £148 or less per week to ensure benefit cover without making either
employer or employee NI contributions.15
24. Other, non-tax, reasons may lead an individual to choose to operate through
a personal service company; the PCG told us that 84% of their members
choose to incorporate for non-tax reasons.16 These reasons include limited
liability and flexibility; we were also told that operating through a company
provides ‘credibility’ in some industries.17 John Whiting told us that:
“Operating on one’s own is increasingly a lifestyle choice for many
people, and once that decision has been taken, operating through a
personal service company can make sense for many reasons … Saving
(tax) money will always be a factor, though not necessarily the main
driver”.18
25. In some industries, where skills are at a premium, individuals can choose to
operate through a personal service company. Oil and Gas UK told us that
the number of personal service companies engaged had increased, because
highly skilled individuals could insist upon their use:
“The principal reason why it is so high in our particular industry is
supply and demand. We compete globally for talent. Many of our
members operate globally and deploy their resources on that basis. The
industry in the UK has been very technically challenging and is quite
mature, so the expertise that has been developed is highly prized and
valued throughout the world. It has been a feature for some time, but I
think the proportion has increased … We have vacancies for literally
13 Income Tax (Trading and Other Income) Act 2005, section 34. Expenses incurred wholly and exclusively
for the purposes of the trade are deductible in arriving at taxable profits of an unincorporated business.
Income Tax (Earnings and Pensions) Act 2003, section 336(1)(b). Expenses incurred wholly, exclusively
and necessarily in the performance of the duties of the employment may be deducted from an employee’s
taxable earnings., Corporation Tax Act 2009, section 54. Expenses incurred wholly and exclusively for the
purposes of the trade are deductible in arriving at taxable profits of a personal service company.
14 PCG, supplementary written evidence.
15 BCS, the Chartered Institute for IT
16 Q 44
17 Ibid.
18 John Whiting
thousands of people in the industry … the driver has come very much
from the individuals themselves, and there is certainly a desire to reduce
that ratio among our members”.19
26. There are, however, some potential disadvantages for individuals choosing to
operate through a personal service company. These can include lack of
holiday pay, sick pay and paid training, and the absence of various rights and
protections such as maternity leave and working time protections. Pension
entitlements may suffer, with it being unlikely that individuals would benefit
from workplace pension provision.
27. In addition, the impetus for operating through a company can come from the
engager, rather than the individual. The engager is under no obligation to
pay employers’ National Insurance contributions, and also does not have to
provide the various rights and entitlements, as set out above, that would be
offered to a regular employee.
28. The FCSA told us that: “In a number of sectors/industries either recruitment
businesses and/or end clients insist on the use of a limited liability supplier
for flexible workers. This is driven by managing the risk of employment
rights and unpaid taxes”.20 Amey plc told us that, “for tax risk reasons”, it
rarely takes on a freelance consultant for a temporary contract unless he or
she agreed to operate through a personal service company.21 The ICAEW
cited the broadening scope of employment law and new entitlements for
employees as driving the growth of personal service companies. They told us
that there would “be pressure from employers in a wider sense for people to
adopt these structures in certain cases” and that this would continue, “absent
any major policy changes”.22
29. More generally, we heard that the growth in the number of personal service
companies was a reflection of structural changes in the UK labour market.
The Institute of Directors (IoD) suggested that:
“Since the 1990s and particularly so in the aftermath of the credit
quake, many businesses have needed to adopt more flexible business
models as the predictability and security of their revenues has been
adversely influenced by macroeconomic factors. Most businesses
consider themselves to have a less powerful position in relation to their
customers but a more powerful position in relation to their suppliers and
employees. Accordingly, we consider it is wholly unsurprising that there
has been a growth in the use of personal service companies where their
use is sustainable”.23
30. A changing regulatory environment may also have been partly responsible for
increasing numbers. The Conduct of Employment Agencies and
Employment Business Regulations 2003, commonly known as the ‘conduct
Regulations’ or ‘agency Regulations’, came into force in April 2004.24 The
Regulations govern the conduct of the private recruitment industry and
19 Q 75
20 FCSA
21 Amey plc
22 Q 39
23 IoD
24 See http://www.legislation.gov.uk/uksi/2003/3319/made SI 2003 No 3319, made under the Employment
Agencies Act 1973.
establish a set of minimum standards that clients (both engagers and work-
seekers) are entitled to expect.25 Under the regulations, an employment
business must ensure that temporary workers are paid for all the work that
they do (even if payment has not been received from the end-client), that
they receive paid holidays and that they are not forced to work longer than
48 hours per week. A range of further provisions and protections apply.
31. Regulation 32 offers a personal service company the opportunity to opt out
of the Regulations.26 The decision to opt out must be notified in advance of
the contract commencing, and lasts only for the duration of the contract in
question.
32. A large proportion of contractors source their work through agencies, rather
than directly from end-clients. We were told that some engagers and
employment agencies encouraged individuals to provide their services
through a personal service company, in order to avoid liabilities under these
regulations and thereby reduce costs.27 The IIM told us that they advise their
members to opt out when negotiating contracts;28 APSCo, a trade body
representing recruitment companies, told us that 98.6% of contractors who
secure work through their members opted out of these provisions.29
33. Sections 44 to 47 of the Income Tax (Earnings and Pensions Act) 2003 were
also said to have played a role in the growth in numbers of personal service
companies. These provisions require employment agencies to make
deductions for PAYE from the earnings of the worker that they engage and
supply to clients, where that worker is subject to the client’s supervision,
direction or control. The PCG stated that:
“Recruitment agencies will typically insist upon freelancers using a
limited company. Agencies would be exposed to large legal and tax
liabilities if they were to pay a sole trader gross because of sections 44–
47 of the Income Tax (Earnings and Pensions) Act, therefore they prefer
to deal with an individual working via their own limited company”.30
Kate Cottrell, an IR35 specialist who runs her own advice firm, agreed that
these provisions had had a significant effect upon the growth in personal
service company numbers.31
34. The Agency Worker Regulations,32 which came into force in October 2011,
also appear to have had an effect. The Regulations give agency workers the
entitlement to the same basic employment and working conditions as if they
had been recruited directly, once they have completed a qualifying period of
12 weeks in the same job.33
25 Department for Trade and Industry, Guidance on the Conduct of Employment Agencies and Employment
Business Regulations, 2003.
26 See http://www.legislation.gov.uk/uksi/2003/3319/regulation/32/made SI 2003 No 3319, made under the
Employment Agencies Act 1973.
27 Giant Group
28 IIM
29 Q 48
30 PCG
31 Q 23
32 See http://www.legislation.gov.uk/uksi/2010/93/pdfs/uksi_20100093_en.pdf , SI 2010 No. 93, made under
the Health and Safety at Work Act 1974 and the European Communities Act 1972.
33 Department for Business, Innovation and Skills, Agency Workers Regulations: Guidance, May 2011.
35. The definition of agency worker to which the Regulations apply excludes
cases where there is a contract whereby the agency or the end hirer is dealing
with an individual carrying out a profession or business undertaking.34
Guidance to the regulations makes clear that “individuals who find work
through a temporary work agency but are in business on their own account
(where they have a business to business relationship with the hirer who is a
client or customer)” are likely to fall outside the scope of the Regulations.35
36. We were told that this exemption for personal service companies had
encouraged movement of individuals from other intermediaries, such as
umbrella companies, into personal service companies. APSCo told us that:
“The agency workers regulations increased the number of contractors
moving from umbrella models to personal service company models,
certainly in the professional sector. The main reason for that, we
understand, was that professional contractors do not want the
protections afforded to them by this employment-related legislation”.36
37. Others, however, felt that the ‘push’ came from the agencies. A major
umbrella company, the Giant Group, told us that the use of umbrella
companies was declining as more and more individuals were “pushed” into
using personal service companies by agencies, in order to avoid the Agency
Worker Regulations and the 2003 Regulations.37 The use of umbrella
companies is considered in more detail in Chapter five of this report.
38. It is apparent that a number of factors, including labour market changes,
regulatory changes and, in some industries, skills shortages, have driven the
growth in the number of personal service companies over recent years. This
growth has taken place despite the introduction, in 2000, of the ‘IR35’ rules.
The IR35 legislation

39. This section provides some brief background to the IR35 rules. A more
detailed consideration of the operation and efficacy of the rules is provided in
Chapter three.
40. As part of the March 1999 Budget, it was proposed that a number of changes
would be made to ensure that people working through personal service
companies in a manner that could be considered ‘disguised employment’
would, in practice, pay the same tax and National Insurance as someone
employed directly. Details were provided in a press notice issued at the time
of the Budget, which was numbered ‘IR35’.38 The legislation which has
developed subsequently is commonly known as the ‘IR35 legislation’, or
‘IR35 rules’.
41. The IR35 press notice stated that:
“Businesses employing their workers directly say that they are unable to
compete with those encouraging the avoidance at which the new
legislation is aimed. As a result, ordinary workers can find they are
34 SI 2010 No. 93, paragraph three.

35 Department for Business, Innovation and Skills, Agency Workers Regulations: Guidance, May 2011.
36 Q 48
37 Giant Group
38 Inland Revenue Budget press notice IR35, Countering avoidance in the provision of personal services, 9 March
1999 (Appendix 5).
unable to compete for jobs with those willing to participate in such

arrangements. But those who do participate often have to pay a price in
terms of loss of protection under employment law … The proposed
changes are aimed only at engagements with essential characteristics of
employment. They should affect only those cases where these
characteristics are disguised through the use of an intermediary—such as
a service company or partnership. There is no intention to redefine the
existing boundary between employment and self-employment”.39
42. Legislation was introduced in the Finance Act 2000.40 The income tax
provisions related to IR35 were contained in section 60 and Schedule 12 of
the Act. Measures relating to National Insurance were introduced in the
Social Security Contributions (Intermediaries) Regulations 2000.41
43. The explanatory notes for the Finance Bill explained that Schedule 12
introduces “new rules concerning the taxation of workers who provide their
services to clients through intermediaries, such as personal service
companies”.42 They went on to state that: “The new rules use existing case
law to define an employee and determine that, where workers meet that
definition in relation to work done for their clients, they will pay broadly the
same tax and NICs as an employee, even if they provide their services
through an intermediary”.43
44. Section 60 of the Act gives effect to Schedule 12. Schedule 12, paragraph 1
states that:
“This Schedule applies where—
(a) An individual (“the worker”) personally performs, or is under an
obligation personally to perform, service for the purposes of a
business carried on by another person (“the client”),
(b) The services are provided not under a contract directly between the
client and the worker but under arrangements involving a third party
(“the intermediary”), and
(c) The circumstances are such that, if the services were provided under
a contract directly between the client and the worker, the worker
would be regarded for income tax purposes as an employee of the
client”.44
45. Schedule 12, paragraph 2 states that:
“If, in the case of an engagement to which this Schedule applies, in any
tax year—
39 Ibid.
40 Finance Act 2000, available at: http://www.legislation.gov.uk/ukpga/2000/17/contents
41 SI 2000 No 727. Corresponding regulations for Northern Ireland were made in SI 2000 No 728. These
regulations were made under the Welfare Reform and Pensions Act 1999 (sections 75 and 76); an
amendment was introduced during the passage of the Bill to facilitate the making of these regulations.
42 Explanatory note for Finance Bill 2000, clause 59 and Schedule 12, available at:
http://www.hmrc.gov.uk/ir35/explanatorynote.pdf
43 Ibid.
44 Finance Act 2000, Schedule 12.
(a) The conditions specified in paragraphs 3, 4 and 545 are met in

relation to the intermediary, and
(b) The worker, or an associate of the worker—
(i) Receives from the intermediary, directly or indirectly, a
payment or other benefit that is not chargeable to tax under
Schedule E, or
(ii) Has rights entitling him, or which in any circumstances would
entitle him, to receive from the intermediary, directly or
indirectly, any such payment or other benefit.
The intermediary is treated as making to the worker in that year, and the
worker is treated as receiving in that year, a payment chargeable to
income tax under Schedule E”.46
46. Parts 2 and 3 of Schedule 12 set out detailed computational rules, including
those used for calculating any tax payments to be made. These complex rules
provide for notional calculations to be made, based on deemed payments and
set deductions.
47. The provisions contained within Schedule 12 provide the essence of the IR35
rules, with “the circumstances” referred to in paragraph 1 (c) being
determined on the basis of case law regarding employment for income tax
purposes. The use of case law in this manner has been central to subsequent
discussion about the complexity of the rules.47
48. Schedule 12 applies to specific contracts, rather than the wider, fuller activity
of a worker or intermediary. As such, the IR35 rules apply on a ‘contract-by-
contract’ basis. This aspect of the rules adds further complexity; John
Whiting described the approach as “innately clumsy”.48
49. The introduction of these rules was controversial at the time. The PCG
stated that the proposals “show astonishing naiveté of the knowledge-based
entrepreneurial sector and tip the balance in favour of large US companies at
the cost of small British enterprises”. The Chairman of the PCG described
the measures as “a body blow to enterprise culture”.49
50. In October 2000 the PCG was granted leave by the High Court to proceed
with a judicial review to examine whether the legislation was consistent with
the Human Rights Act 1998. On 2 April 2001 the Court decided in favour of
the Revenue on all counts, awarded costs to the Revenue and refused the
PCG leave to appeal.50
45 Paragraph three sets out criteria which identify company intermediaries to which the rules apply. Paragraph
four introduces the criteria which identify partnership intermediaries to which the rules apply, and
paragraph five identifies intermediaries who are individuals to which the rules would apply.
46 Finance Act 2000, Schedule 12.
47 See Chapter three.
48 Q 15
49 PCG Press Notice No 12/99, 23 September 1999.
50 R (on the application of Professional Contractors Group Ltd) v Inland Revenue Commissioners [2001] EWHC
(Admin) 236.
Subsequent changes to the legislation

51. The rules first set out in the 2000 legislation were consolidated in the Income
Tax (Earnings and Pensions) Act 2003, with the relevant provisions being
found in Chapter eight. The original paragraphs set out in detail above are
replicated in sections 49 and 50 of the 2003 Act.51
52. In the Finance Act 2007 the Government introduced legislation relating to
managed service companies.52 Managed service companies offered a vehicle
through which contractors could place their accounting and invoicing
processes, without having to manage directly these functions themselves.
Prior to the managed service companies legislation, it was not uncommon for
groups of up to 20 contractors to form a composite company, in which they
were all shareholders. This limited the running costs of the business, and
allowed the individuals concerned to take remuneration in the form of
dividends rather than salary, offering tax benefits. It was thought that this
structure was being used to circumvent the IR35 provisions.
53. A more recent change was introduced following the Government’s review of
off-payroll arrangements in the public sector. The review, and its
recommendations, are considered in more detail in Chapter six of this report.
54. Following the review, the Chief Secretary to the Treasury announced a
consultation about ‘controlling persons’. Even if these individuals provided
their services through personal service companies, the engaging organisations
would be responsible for deducting income tax and National Insurance as if
they were employees on the payroll.53 In the event, this initiative was not
pursued. Instead, the Finance Act 2013 introduced an amendment to section
49(1)(c) of the income tax (Earnings & Pensions) Act 2003 which specified
that the IR35 rules can apply to ‘office holders’, as well as those who might
be engaged in circumstances which could be considered to constitute
employment.54
Recent debate and proposals for reform
The OTS Review of Small Business Taxation

55. In July 2010 the Government announced that a review of small business
taxation would be undertaken by the OTS, and that this would include
exploring alternative legislative approaches to IR35.55 The OTS was asked to:
 Identify and provide evidence of the complexity and uncertainty created
by IR35;
 Consider alternative legislative approaches that would be simpler and
create certainty while ensuring that, where intermediaries are used to
disguise employment, any income that is effectively employment income
is taxed fairly; and
51 The one substantive change is to remove the reference to Schedule E, with reference instead made to
‘employment income’ and ‘earnings from employment’.
52 Part 3, section 25. Detailed provisions contained in Schedule 3.
53 HC Deb, 23 May 2012 col 1161.
54 Provision to this effect is made in Finance Act 2013, section 22.
55 HMT press notice 29.10, 20 July 2010.
 Consider the scope for tax avoidance and the extent to which alternatives
to IR35 would affect it.56
56. The OTS published an interim report in March 2011. The main
recommendation was that the Government should look at the integration of
income tax and national insurance. This would remove one of the incentives
for incorporation. Recognising that this would take some time to achieve, the
OTS identified three options which could deliver more immediate
improvements to the impact of IR35.57 The first option was to suspend IR35,
with a view to permanent abolition. The OTS stated that:
“From the perspective of simplification, abolition of IR35 delivers the
greatest improvement, providing individuals with certainty over tax
status and removing legislation … The OTS’s view is that a
commitment from the Government to the integration of income tax and
NICs would lead to a reduction in the tax motivation for incorporation,
and would limit the long term cost of this option … The OTS is not in a
position to calculate the amounts at risk but it could clearly be
significant; work on the figures is needed and must be realistic”.58
57. The second option put forward was for HMRC to improve the
administration of IR35. It was suggested that improvements could deal with
issues such as the fear of investigation, the length of time an investigation
takes, and enabling individuals to self certify their IR35 status. More
consistency from HMRC was also thought to be required.59
58. Finally, it was suggested that the Government might wish to consider the
introduction of a test which would exempt some businesses from IR35
entirely. The proposal was to establish a range of simple tests that those at
risk of falling within IR35 could apply to their situation, in order to gain a
measure of certainty regarding their status.
59. In the Budget Report 2011 the Government stated that IR35 would be
retained “as abolition would put substantial revenue at risk”.60 The
Government were, however, committed to making clear improvements in the
way that IR35 is administered. A number of changes to HMRC’s
enforcement and compliance activities on IR35 have been made since then;
the effect of these is considered in Chapter four of this report.
Autumn Statement 2013 and Finance Bill 2014

60. In the Autumn Statement 2013 the Government set out a number of
measures which seek to make a clearer distinction between employment and
self-employment. These measures are of contextual relevance to the work of
the Committee, illustrating that the difficulties encountered in determining
employment status extend across a wide range of engagements and
situations.
56 HM Treasury, Small Business Tax Review: terms of reference, (2012). Available at:
https://www.gov.uk/government/publications/small-business-tax-review/small-business-tax-review-terms-of-
reference
57 The findings of the OTS review, and the Government response to it, are considered in more detail in
Chapter three.
58 OTS, Small Business Tax Review, March 2011, pp. 39–42.
59 Ibid.
60 HC 836, March 2011, paragraph 2.203.
61. One such measure deals with onshore employment intermediaries, with draft
legislation set out in an HMRC consultation document published in
December 2013.61 The measures proposed seek to target PAYE and National
Insurance avoidance; the intermediaries in this context are usually
employment agencies, working through a complex structure of companies to
avoid tax and National Insurance, as well as the payment of holiday pay. The
proposed new rules will focus on whether the individual is subject to, or has
the right of, supervision, direction or control as to the manner in which their
duties are carried out. If an intermediary or agency contracting with the end
client exercises control it will have to operate PAYE and also pay National
Insurance contributions.
62. The Autumn Statement also contained proposals dealing with salaried
partners in Limited Liability Partnerships (LLP).62 At present, it is possible
for a salaried partner of an LLP to receive more favourable tax treatment
than an individual who is an employee of a company engaged on similar
terms.63 The LLP is also not liable for employer’s National Insurance
contributions on a member’s profit share. The Government propose treating
an LLP member as an employee for tax and National Insurance purposes if
each of three new tests are met.64 These new rules are expected to come into
force on 6 April 2014.
63. The third of the relevant Autumn Statement proposals deals with offshore
employers who have no presence, residence or place of business in the UK.
These structures, often involving chains of intermediaries, are increasingly
being marketed and promoted as a legitimate way to avoid employer’s
National Insurance. Benefits for the individual are sometimes further
enhanced through the use of Employee Benefit Trusts and other mechanisms
to limit further the tax payable on any income.
64. Following consultation in May 2013,65 the Government confirmed, in the
Autumn Statement 2013, that they would create obligations on offshore
employers employing workers in the UK. If the offshore employer fails to pay
the charge can be moved to an onshore engager of the labour. It is likely that
the liability will attach to the intermediary which is closest in the chain to the
business which uses the worker.66 These changes will also take effect from 6
April 2014.
61 HMRC, Onshore Employment Intermediaries: False Self-Employment, Consultation document, (2013). Available
at:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/264649/Onshore_employme
nt_intermediaries_-_false_self_employment.pdf.
62 HMRC, Partnerships review: limited liability partnerships: treatment of salaried members. Available at:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/264620/4._Partnerships.pdf
63 The Limited Liability Partnerships Act 2000 introduced a provision allowing members of an LLP to be
taxed as if they were partners in a partnership established under the Partnership Act 1890 (i.e. a traditional
partnership), even if they were engaged on ‘salaried partner’ terms.
64 The proposed tests are as follows: (i) The member performs services for the LLP in his or her capacity as a
member, and is expected to be wholly or substantially rewarded through a ‘disguised salary’ that is it is
fixed or, if varied, varied without reference to the profits or losses of the LLP; (ii)The member does not
have ‘significant influence’ over the affairs of the partnership; (iii) The member’s investment contribution
to the LLP is less than 25% of the ‘disguised salary’.
65 HMRC, Offshore Employment Intermediaries Summary of Consultation Resposnses, (2013). Available at:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/249786/Summary_of_Respo
nses_Offshore_Employment_Intermediaries.pdf
66 PWC, United Kingdom: Tax changes announced in the Autumn Statement, 5 December 2013.
CHAPTER 3: THE CONTINUING VIABILITY OF THE IR35

LEGISLATION
Introduction and Background

65. The primary focus of the Committee’s investigation was on the use of
personal service companies and the associated consequences for tax
collection. The inquiry raised broad questions about the associated legislative
framework. Within these broader issues, the core questions which we address
stem from the IR35 legislation, its interpretation and HMRC’s ability to
administer and monitor it.
66. The 1999 Budget Press notice ‘IR35’ which announced the introduction of
the rules stated:
“There has for some time been general concern about the hiring of
individuals through their own service companies so that they can exploit
the fiscal advantages offered by a corporate structure. It is possible for
someone to leave work as an employee on a Friday, only to return the
following Monday to do exactly the same job as an indirectly engaged
‘consultant’ paying substantially reduced tax and national insurance.
The Government is going to bring forward legislation to tackle this sort
of avoidance”.67
67. We were conscious that any consideration of the success or otherwise of the
legislation should take account of these original aims and so we sought to
investigate whether the practice outlined above was still commonplace.
Whilst we heard very little evidence of individuals leaving employment only
to return in a ‘consultant’ role, we did hear from some in the private sector
about the commercial benefits of recruiting individuals through limited
companies.68
68. We were also interested in what drove people to incorporate more generally
in the first place and the extent to which this was motivated by a potential tax
advantage. HMRC explained to us that in their opinion, the growing
phenomenon of personal service companies could be explained “primarily for
commercial reasons but, it also has to be said, partly to avoid or mitigate
tax”.69 In response to this, the IR35 legislation itself had been drafted to
ensure that broadly the same tax is paid by applying a tax framework akin to
that of a conventional employment relationship.
69. There appear to be particular problems in having to apply the rules on a
contract-by-contract basis, which can make them especially cumbersome. As
mentioned in the previous Chapter,70 the IR35 legislation applies to
engagements which, but for the presence of an intermediary (such as the
personal service company), would be regarded as conventional employment
relationship. This has the aim of ensuring that broadly the same amount of
tax and National Insurance is paid regardless of the use of an intermediary.
This judgment is applied on a contract-by-contract basis, rather than by
67 Appendix 5
68 Oil and Gas UK and Amey plc
69 Q5
70 Paragraphs 44 and 45
reference to the totality of the activity of the individual who works through a
personal service company. Consequently, contractors find that they have to
consider whether IR35 applies to each of the contracts under which they
operate rather than establish the tax status of their personal service company.
70. Our Call for Evidence71 asked the following question: “To what extent does
the current IR35 legislation impose additional compliance burdens and
administrative costs?” This question sought to gather information on both
the compliance and administrative costs to Government, in the form of
HMRC, and to British business. The PCG told us of the expensive
administrative and cost implications of contractors having to seek
accountancy advice and private contract reviews.72 We deal with HMRC’s
administration costs in Chapter 4.
71. The IR35 legislation was initially justified on the basis of a significant risk to
the Exchequer of the loss of tax and National Insurance revenue. HMRC
initially told us that the Exchequer risk was £475m but when we asked them
to provide further details we were told that the total estimated fiscal risk was
now £550m. HMRC provided the Committee with a breakdown of this
figure73 which comprised an Exchequer yield of £30m and Exchequer
protection of £520m, the latter figure having increased in recent years, partly
because of a reduced estimated income threshold at which HMRC consider
an individual may decide to establish and operate through a personal service
company. We were told that the Exchequer protection figure was made up
of:
(1) £115m from people who currently provide their services through a
personal service company and who would pay a greater proportion of
their income through dividends in the absence of IR35. This is
calculated as 220,000 directors estimated to be deterred from avoiding
£500 per person on average; and
(2) £405m which is made up of people who are currently directly employed
who would incorporate and provide their employment services through a
personal service company were it not for IR35. This is calculated as
55,000 employees who would incorporate and avoid tax and National
Insurance of around £8,000 per person on average.74
72. The reliability of these figures formed part of our questioning to HMRC
when they appeared before us for the second time at the end of our inquiry.
We were told that HMRC aimed to derive a reasonable central estimate of
the costs of any measure in the Knowledge, Analysis and Intelligence
Directorate and that this was subject to a quality assurance process before it
was scrutinised further by the Office for Budget Responsibility.75 It was not
clear to us that these figures were reliable. The 220,000 directors cited in
connection with Exchequer protection was a higher population than the
figure of 200,000 which we were given for the number of operating personal
service companies and it was not clear on what basis either this population or
the figure of £500 per director had been calculated. In respect of the 55,000
71 Appendix 3.
72 PCG.
73 HMRC, Q2 and Q116
74 HMRC and Q116
75 Q 116
employees who would move to incorporate in the absence of IR35, we were

told that this represented 4% of employees who earn over £50,000. We were
also told that the OTS had estimated that 1.8% of individuals with an
employment income of between £50,000 and £150,000 might incorporate in
the absence of IR35.76 HMRC made it clear repeatedly that these overall
figures were only estimates based on the available evidence. Given the critical
importance of these calculations in justifying the existence of the IR35
legislation, we were of the opinion that more robust work was needed in this
area.
73. We recommend that Her Majesty’s Revenue and Customs carry out
and publish a detailed assessment of the current Exchequer
protection figure and of the costs that taxpayers incur in dealing with
IR35. This should enable a better assessment of whether the
legislation is having the intended effect and is proportionate.
(Recommendation 1)
The effectiveness of the legislation

74. The Committee heard from a wide range of interested parties who consider
that the current legislation is ineffective; a large number of the written
submissions made this point forcefully. Contractor Calculator, an
independent, online guide for contractors, stated that: “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”.77 The broad sentiment expressed here was
echoed by many. The Association of Accounting Technicians (AAT) and
Chartered Institute of Payroll Professionals (CIPP) argued that the
legislation was poorly thought through when drafted and remained unclear.
Their argument seemed to be a qualitative one based on the ambiguity of the
rules and uncertainty amongst taxpayers who were expected to abide by
them. HMRC acknowledged that they were aware that many find the
legislation difficult to understand but maintained that, on the whole,
understanding had increased over the years.78
75. A great deal of evidence was submitted which displayed a high degree of
hostility to the legislation in its current form. Many viewed the legislation as
outdated, attempting to address a situation and market which in reality no
longer existed. We were told that HMRC were trying to apply an outdated
method of taxation to a new, emerging way of working.79 The IIM suggested
that the ‘rules’ did not reflect the underlying reality of the way freelancers
worked and the Interim Management Association (IMA) argued that the
legislation needed updating to be more reflective of the maturing labour
market. The reliance on case law as a method of assessment, and a
preoccupation with defining the tax position on a contract-by-contract basis
appeared to be the primary criticisms here and an alternative approach is
discussed in the next Chapter.80
76 Q 116
77 ContractorCalculator
78 Q8
79 Peter Disney
80 Paragraph 131.
76. Conversely, organisations such as G4S plc, Amey plc and Oil and Gas UK,
all responding as clients of personal service companies, were more
supportive. Amey plc suggested that the principles of IR35 were appropriate
and pragmatic, whilst G4S plc suggested that, as a client, they felt that the
legislation was effective and efficient in managing the tax risks of using
intermediaries. We were told very clearly by various parties from the business
sector that the status quo should be maintained, though it was less clear
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. We were also mindful that Government and the public sector are
significant users of personal service companies, arrangements which can
benefit all parties in a similar way to those in the private sector. The
Confederation of British Industry (CBI) and the IoD echoed this sentiment
of approval in their oral evidence to the Committee,81 but again, their
satisfaction was less rooted in the benefits for the Exchequer and more in the
flexibility that current arrangements afforded to their members.
77. It is clear that in certain situations, the use of personal service companies can
be beneficial for business. The oral evidence given by Amey plc summarised
the potential benefits well:
“We need access to specialist skills, commonly at short notice, for a
limited duration. To have that level of resource on the books
permanently is expensive and inefficient if we have people sitting around
waiting for a particular project to happen … if we need somebody for
three months or six months and we give them an employment contract,
that raises a whole host of issues that are disproportionate to the
intended length of the relationship and can include equality of employee
rights, auto-enrolment for pensions and involvement in our flexible
benefits reward scheme. 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”.82
78. 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.
79. Moreover, we note that compliance with the rules can demand a great
deal of time and effort on the part of contractors. We acknowledge
that it can be difficult for individuals contracting through personal
service companies to define their tax and National Insurance position
quickly and accurately because of the contract-by-contract nature of
IR35 and the need for a sound understanding of case law.
The Call for Reform

80. We were aware that there were strong opinions on the complexity and
appropriateness of the IR35 legislation. As noted in Chapter 2, the
Government asked the OTS to look at alternative approaches as part of its
Review of Small Business Taxation which reported in 2011. Our Call for
81 QQ 93–104
82 Q 76
Evidence asked the following question: “Should the current intermediaries

legislation be reformed and if so, what would be the alternatives?”
81. The OTS’s suggestion of an eventual merging of income tax and National
Insurance83 was supported in evidence to us by Professor Judith Freedman
(Pinsent Masons Professor of Taxation Law at the University of Oxford),
AAT, CIPP and Contractor Calculator.84 Similar points were made by the
ICAEW and Julius Hutson, a Chartered Accountant. This was rejected by
the Government in their response to the OTS’s report in 2011. 85
82. The OTS also presented some IR35 reform options in its 2011 report, the
first of which was suspension of the legislation prior to permanent abolition.
This was supported by the PCG86 and others in evidence to us. On this
point, Mr Whiting, Director of the OTS, stressed the deterrent effect of IR35
which would be difficult to quantify:
“The risk would clearly be that if HMRC says that it is suspending IR35
and will not operate any investigations, people might say, ‘Oh, it’s open
season, we can do what we like’. We recognised that, so we felt it would
be possible to announce the suspension by saying, ‘We are suspending it
but not abolishing it, and if we see a marked move up in behaviour that
would blatantly be caught by IR35, the suspension will be removed’.
That is the risk that we had in mind”.87
83. As discussed above, a key question that emerged was whether HMRC’s
calculations of the deterrent effect of IR35 (Exchequer protection) are
accurate and hence whether abolition would do more harm than good. This
underpins Recommendation 1 which calls for a detailed assessment of the
Exchequer protection estimates.
84. The Government chose to pursue the OTS’s option of improving the
administration of the legislation88 and we examine these changes later in this
Chapter.
85. We also heard other suggestions in evidence. The IIM suggested that IR35
should be replaced by a straightforward genuine self-employment
certification process; a similar proposal was made by David Ramsden of the
Federation of Small Businesses (FSB), although such a proposal was not
common amongst the wider evidence. There would be clear benefits to such
a system, but whether it would apply on a contract by contract basis and the
administrative implications of this are unclear. There are clear arguments
that people should be free to operate outside conventional employment
structures if they wish to do so.89 A more difficult question is whether that
choice should be conclusive for tax purposes given the tax and National
83 The issue has been a continuous thread in the discussion of tax reform in the United Kingdom and has
recently been discussed in a Ten Minute Rule Bill in the House of Commons which had the primary aim of
changing the name of National Insurance to Earnings Tax. See HC Deb, 25 February 2014, cols 164–166.
84 AAT, CIPP and ContractorCalculator
85 Government Response to the recommendations of the Office of Tax Simplification’s Small Business Tax Review,
2011.
86 PCG
87 Q 14
88 Government Response to the recommendations of the Office of Tax Simplification’s Small Business Tax Review,
2011.
89 PCG
Insurance incentives that are on offer to those who operate through a

corporate body.
86. A number of suggestions for new ‘rules’, which may act to simplify the
process were also made. Amey plc suggested that there might be a case for
looking more closely at any engagement which lasted for more than a set
period of time; other variants of this principle were also suggested detailing
differing timescales. The Giant Group suggested that a minimum number of
clients per year could be defined, or that a rule around any one client
exceeding a certain percentage of personal service company turn-over could
be developed. We were interested to hear from Professor Freedman that a
percentage system is used in Australia, though the extent to which this is
effective is unclear.90
87. We believe that the abolition or suspension of the IR35 legislation as
proposed by the Office of Tax Simplification, whilst attractive, would
be unwise if the legislation has the Exchequer protection effect
claimed for it by Her Majesty’s Revenue and Customs.
88. The current structure and rates of income tax and National Insurance
provide an incentive for taxpayers to arrange their financial affairs in
order to minimise the amount of tax and National Insurance paid.
This has lead to complex legislation, such as IR35, to counter such
arrangements.
89. Whilst we recognise the complexities in merging income tax and
National Insurance and the effect that this may have on the
contributory principle, we recommend that the Government re-
examine the longer term case for combining taxes on income and
National Insurance. (Recommendation 2)
Responsibility
90. In the first draft of the IR35 legislation the onus was intended to rest with the
end-user rather than the individual in determining whether IR35 should
apply to a contract. The Committee’s Call for Evidence therefore asked: “Do
businesses insist on the use of personal service companies? If so, should
responsibility be placed on them rather than the worker to decide whether a
business transaction falls within IR35?”
91. Currently, the responsibility to take due account of IR35 and associated
personal service company legislation rests with the individual who is
operating through the personal service company. Efficient and effective tax-
collection appears to occur only when the individuals concerned are soundly
advised and aware of the complexities involved. For those who do not fall
into this category, the expectation that they will declare their status as falling
within the intermediaries legislation seems to be rather optimistic as detailed
in Chapter five. It has been suggested that the responsibility for assessing
IR35 compliance should move from the individual operating through the
personal service company to the end-user. The Committee heard that a
greater level of responsibility could fall on the engager as was first proposed
in the Government’s consultation prior to the introduction of the IR35
legislation. The ICAEW suggested that engagers should bear the
responsibility if they insist in engaging an individual through a personal
90 Paragraph 131.
service company;91 others argued that they should be held responsible for any
unpaid tax resulting from disguised employment.
92. Although taking this step would remove the responsibility from the individual
operating through a personal service company, it would place significant
administrative pressure on engaging businesses. The CBI argued that the
legal responsibility for determining IR35 status should remain with the
personal service company; this view seemed to be shared by most of those
from the world of business and was convincingly put to the Committee by
GlaxoSmithKline plc (GSK):
“I do not think it would be appropriate for, say, GSK to be accountable
for the personal service company paying the appropriate amount of tax.
It is a decision made by the worker … they clearly are aware of what it
means to set up a personal service company and so on, so the
accountability needs to be with the personal service company. We have
no thoughts on how to modify the rules that would change that”.92
Although there are many instances in which businesses undertake elements
of the administrative work of collecting taxes such as PAYE and the
Construction Industry Scheme (CIS), the majority of the evidence we
received did not support placing the onus on businesses to make judgements
about whether contracts fall within the IR35 rules.
93. We received much evidence on the questions posed on the various tax return
documents, specifically the personal tax return SA100 and the employer tax
return P35, which was used before the introduction of Real Time
Information (RTI). In the case of the latter, we noted that similar questions
must still be answered in the year end declarations made by employers
online. In each case, HMRC references ‘service companies’ with questions
aimed at detecting activity from both sides of contracting activity, but
without a detailed articulation of what ‘service company’ means. The SA100
form defines the term as “a company which provides your personal services
to third parties”, but gives no indication that IR35 may need to be
considered. Indeed, the guidance note SA150 limits the explanation of what
constitutes a ‘service company’ to the following paragraph, again without
referencing IR35:
“You provided your services through a service company if:
 you performed services (intellectual, manual or a mixture of both) for
a client (or clients); and
 the services were provided under a contract between the client(s) and
a company of which you were, at any time during the tax year, a
shareholder; and
 the company’s income was, at any time during the tax year, derived
wholly or mainly (that is, more than half of it) from services performed
by the shareholders personally.
Do not complete this box if all the income you derived from the
company was employment income”.93
91 ICAEW
92 Q 110
93 HMRC Document, SA150.
We were of the firm opinion that this was a missed opportunity to raise
awareness of the potential tax consequences of operating through a personal
service company.
94. We also heard that in many cases the questions were left unanswered.
HMRC told us the following:
“For 2011–12, which is the last year for which we have the data, 1,000
individuals completed the question on the income tax self-assessment
return and 120,000 employers answered “yes” to the question on the
P35 that they were a service company. Demonstrably, the difference
between the two figures and the difference between the 1,000 and the
200,000 figure, which we estimate as the number of personal service
companies, demonstrates that the number of people completing the
question on the income tax self-assessment return is extremely low. We
believe that is for a number of factors: in some cases ignorance, in some
cases a conscious decision not to complete”.94
95. When asked about the purpose of the question, HMRC told us that although
they may consider any lack of completion as a risk indicator, they do not see
it as a “key question”95 that would render the individual liable to penalties for
an incorrect completion. We did not understand HMRC’s rationale for
asking questions on the tax returns but not considering their completion as
important or insisting that taxpayers complete them.
96. HMRC’s role in advising the tax-payer of the risk of a particular engagement
falling within IR35 through their Contract Review Service and in delivering a
judgment after an investigation was a constant feature of the evidence given
to the inquiry and is discussed in more detail in the following Chapter.
Professional Passport, a membership body operating across the flexible
workforce sector, stated that the majority of individuals now operating
through personal service companies were more aware of their responsibilities
than before. It is clear that whoever bears the responsibility for judging
whether IR35 applies needs to be soundly advised and well informed.
97. We acknowledge that businesses would generally resist being made
responsible for IR35 assessment, finding the additional
administrative pressure and liability as overly burdensome.
98. We recommend that Her Majesty’s Revenue and Customs look again
at whether they require complete and accurate responses to the
“service company” questions on the personal tax return SA100 and
the RTI employer year end declaration (formerly P35).
(Recommendation 3)
99. If Her Majesty’s Revenue and Customs decide that they need the
information from those questions, we recommend that their
completion should be made compulsory, backed up by the potential
for penalties to be charged for incorrect answers or non-completion.
(Recommendation 4)
100. If Her Majesty’s Revenue and Customs retain the questions, we
recommend that they revise the guidance notes accompanying the
personal tax return SA100 and the RTI year end declaration by
94 Q 118
95 Q 118
employers to make the relationship to IR35 clearer.

(Recommendation 5)
101. If Her Majesty’s Revenue and Customs decide that they do not need
the information gained from the questions, we recommend that the
questions be removed from the tax returns and declarations.
(Recommendation 6)
CHAPTER 4: HMRC’S ADMINISTRATION AND THE EFFECT OF

RECENT REFORMS

102. Over the course of our investigation, we heard from a wide range of witnesses
who believed that there were significant problems with the administration of
the IR35 legislation. The decrease in the number of annual investigations
from over 1,000 a year in the tax years 2002–04 to only 256 in the tax year
2012–1396 was noteworthy, and the vast proportion of respondents and
witnesses called for a greater emphasis in aiding understanding, either of
IR35 generally, or of new resources to support understanding and
assessment.
103. In light of HMRC’s own estimate of the personal service company
population being in the region of 200,000,97 it is understandable that they
might be unable to investigate all the cases in which there may be a medium
or high risk that IR35 might apply, particularly as it must be considered on
an individual contract basis. Furthermore, HMRC maintain that the overall
size of the personal service company population does not help in targeting
those who may fall into the higher risk categories.98 Although we were told
that risk profiling informs their compliance investigations, the number of
people HMRC have assigned to the compliance task (40 at the last estimate)
and to the Contract Review Service (three people who also staff the IR35
helpline)99 seems rather low when compared with the overall number of
operating personal service companies.100 When this is viewed in the light of a
falling number of annual investigations, it seemed to us that IR35 is currently
of greater value to the Exchequer as a deterrent measure rather than as a
measure which is designed to provide a yield simply through voluntary
compliance. This is supported by HMRC’s estimate of £520m as the
Exchequer protection, a figure more than 17 times that of the actual yield
collected from IR35.
104. There is a danger, however, that the value of this protection will diminish if
taxpayers believe that HMRC are not willing or able to risk profile effectively
in order to inform their compliance investigations. As has previously been
noted, the value of the legislation hinges on the credibility of the Exchequer
protection figure provided by HMRC; anything which has the potential to
reduce this figure should be closely monitored.
Enforcing the legislation

105. Increased activity on the part of HMRC was called for by a variety of bodies
including the ACCA, the FCSA, the IMA and the CBI, though there was no
96 Q3
97 Q1
98 Q2
99 Q8
100 It should be acknowledged, however, that HMRC maintain that enforcement and compliance staff are not
deployed to individual tax regimes and so there is no tangible way of accurately measuring proportionality
in this respect. Q119 and National Audit Office HM Revenue & Customs 2012–13 Accounts, Report by
the Comptroller and Auditor General, R31.
consensus surrounding the degree to which they believed efforts should be

scaled up. Conversely, the PCG suggested that compliance and enforcement
activity should not be increased until further steps have been taken to
improve the clarity of IR35, arguing that an unacceptable ambiguity still
remains and that suspension of the rules is the best short-term remedy.101
106. The IoD and CBI suggested that although HMRC had sufficient legislation
at their disposal to address these matters, they had dedicated insufficient
resources for the task at hand. The FCSA suggest that IR35 is now operating
as effectively as it has been for some time, and that the key challenge is to
enforce the legislation robustly and effectively. However, the Committee
were told by HMRC that they plan to continue with roughly the same
number of investigations as they have conducted in the recent past:
“Currently we broadly intend to maintain compliance coverage i.e. around
250 cases per annum, as we did last year and have done for the current
year”.102
107. In opposition to this light-touch policy, David Kirk, a Chartered Accountant
and Chartered Tax Adviser who specialises in the intermediary sector,
argued that for IR35 to have a deterrent effect, HMRC would need to
conduct in the region of 10,000 enquiries per year, as opposed to the 250
that they are currently aiming to undertake, and that the resources to deliver
this level of activity would not be realistically available. Once again the
deterrent effect of IR35 was cited as important.
108. Professional Passport suggested that focusing on the enforcement of existing
legislation with fast, robust, visible and effective action would result in much
greater returns for HMRC as well as raising the level of compliance. They
argued that HMRC must be put in a position where it can act and react as
quickly as the market. The FCSA believed that enforcement, rather than
reform, was required and G4S plc argued that IR35 is technically sound,
when understood and applied correctly. The twin issues of a need for clarity
and a greater effort to enforce the existing legislation were recurring themes
in the evidence we received.
109. HMRC told us about the recently increased resources available to them for
this operation:
“Our compliance interventions are done by our specialist employer
compliance teams. There are now four teams, totalling 40 people, who
spend not all but a substantial amount of their time on IR35 cases, and
they work on other broader employment and avoidance risks. Those 40
people are part of a much broader employer compliance field force that
look across employers more generally, including other intermediaries
such as umbrella companies and managed service companies”.103
110. In opposition to much of the evidence we received however, they did not
hold that increased resources would be of much benefit. In response to a
question about how extra resources would be used, we were told:
“I do not think we would want to make a direct correlation in that way.
It is not simply about increasing the resources because, as I say, I do not
101 PCG
102 Q3
103 Q 121
think there is necessarily a direct correlation between the resources you

invest and the effectiveness, particularly in this sort of area. I think a lot
of it is about the quality of the interventions and the way we target them
and run our interventions”.104
111. It was also regrettable that HMRC were unable to provide precise costing for
the current compliance and administrative work that directly relates to IR35.
We were told that spending on the current compliance team of 40 people
costs approximately £700,000 a year, a team which collected £1.1m in
2012–13 as a result of uncovering non compliance with IR35. HMRC,
however, made it quite clear that these individuals work as part of a much
broader employer compliance field force which works with legislation other
than IR35.105 In light of the 2011 report of the House of Commons Treasury
Select Committee on Principles of Tax Policy,106 we felt that the overall
practicability of the tax measure and the value for money that it delivers for
the taxpayer needed to be further articulated by HMRC. Concrete figures of
how much the IR35 rules cost to enforce and administer were not
forthcoming; consequently, a cost-benefit analysis of HMRC’s compliance
activity could not be carried out.
112. Her Majesty’s Revenue and Customs did not convince us that the
resources currently allocated were sufficient to ensure compliance
with the IR35 legislation.
113. We recommend that Her Majesty’s Revenue and Customs articulate
with greater clarity the costs they incur from IR35 compliance efforts
and administration, and the relationship between those costs and the
overall yield gained from the legislation. (Recommendation 7)
114. John Whiting made the point that IR35 was never fully intended to be
enforced:
“I have always felt that IR35 was never actually designed to be used, in
the sense of really being applied. In many ways the intention was that
people would recognise that they were caught and say, “Okay, it’s a fair
cop; I will go back on the payroll”, but that rather missed the point—we
are back to my push and pull—that people were often being pushed off
the payroll. My point is that when IR35 was designed in 1999–2000, to
me the way in which it was going to be applied and policed was not
really thought through because it was rather expected that the deterrent,
to come back to your term, would be sufficient; everyone would be back
on the payroll and, frankly, we would not be sitting here”.107
115. We heard that the time taken from opening to closing an IR35 investigation
had been dramatically reduced. Taking on board the points made in the
OTS review that external stakeholders were often concerned about the length
of time taken to complete an investigation, particularly where it was
discovered that there was no liability, HMRC told us that:
104 Q 122
105 Q 121
106 Treasury Select Committee, Principles of Tax Policy (8th Report, Session 2010–11, HC 753). Written
evidence from the ICAEW suggested that in their estimation, IR35 fails on seven of the ten tenets
highlighted in this report.
107 Q 15
“In 2012–13, for cases that we opened since April 2012, it took 28
weeks on average from opening to closing a case. That compares in
earlier years to 110 weeks and over 140 weeks … we are very committed
to dramatically reducing the intervention time”.108
Professional Passport claimed to have seen inquiries closed quickly where
contractors provided evidence of professionally carried out assignment
reviews that HMRC accepted, although the quality of these professional
reviews varied widely. They considered this a positive development.
116. Furthermore, we were assured that investigations are targeted across a wide
range of employment sectors: “We constantly reflect on whether we are
properly targeting our inquiries and the extent to which we should be looking
at particular areas and particular skill sets”.109 The reduction in the average
investigation time of cases believed to fall within IR35 and the broad scope of
targeting is clearly a positive step forward.
Taking the Risk

117. Angela Williams, a Chartered Accountant and Chartered Tax Adviser, stated
that many now take the chance that they won’t be investigated by HMRC.110
This willingness to take a risk suggests that the deterrent effect of IR35 is
diminishing. Professional Passport echoed this sentiment, considering that
their estimates of 200,000 personal service companies and only 250 IR35
investigations a year suggested that the majority of contractors would still be
prepared to take the risk and base their decisions and behaviour on being
outside IR35. The Giant Group suggested that the assignment by
assignment, contract by contract nature of IR35 made it inefficient, and also
effectively impossible to police by HMRC. This might mean that some will
take the risk of not being caught. John Whiting told us that “People hear in
the pub or golf club, ‘Oh, you don’t need to worry about it. You just do such
and such’. I think HMRC is beholden to do all that it can to alert and to
raise IR35’s profile”.111
118. We were told about the growing prevalence of ‘IR35 proof’ contracts and the
numbers of private review services which profess to give individuals
assurances that their contractual arrangements are not caught by IR35.
Whilst a market has grown up around the provision of these supplementary
supports, we heard that the quality and reliability of the advice provided by
different companies varies.112
119. Witnesses113 told us that HMRC’s Contract Review Service, a telephone
helpline established to advise individuals of the likelihood of a particular
contract falling within IR35, was not widely known about and was often
approached with a certain degree of suspicion and trepidation; there was a
fear that a case brought to HMRC for advice might be later reported to the
IR35 case investigation team and the individual might thus become the
subject of a formal investigation. Kate Cottrell told us that:
108 Q6
109 Q7
110 The same comment was also made by Giant Group, written evidence.
111 Q 14
112 Professional Passport
113 Q 28
“On the contract review service there is a huge lack of trust of HMRC
… There have been some articles in the contractor press recently saying,
‘Whatever you do, do not send your contract to the Revenue’. The
problem is that because the Revenue is still working with the original
legislation, it is asking to do things when reviewing a contract that there
is no time to do. They want you to have signed the contract first,
whereas most people, when they have a contract, want to know what is
in it, what is bad, what they want to change, and whether it is properly
reflective of the relationship. There is quite a lot of work to be done on
the contract review service to get people to use it, if indeed they
would”.114
120. The ICAEW suggested that the Contract Review Service should be
publicised to greater effect,115 and that further guidance for non tax
specialists should be introduced. The IMA suggested that IR35 briefing
information could be sent out, alongside new company forms, by Companies
House, and G4S plc suggested that more could be done to raise awareness of
IR35 amongst small businesses. The FCSA felt that HMRC should be more
‘opinionated’ in stating what constitutes good and bad practice,116 and that
they should seek to exert more influence over end-users and agencies.
121. It was encouraging to hear that HMRC were aware of the suspicion that
surrounds the Contract Review Service and that they maintain the
independence of the helpline from the compliance teams, though little
appears to have been done to assure concerned parties:
“We are looking again at the contract review service to better understand
why it is not used more widely. Part of that may be that people are not
aware of the service, but part of it may also be that people are worried
about its confidentiality, although I assure the Committee, as I assure
everyone, that it is confidential and that the team operating the helpline
and the contract review service are quite separate from our compliance
team, so information is not shared”.117
122. We conclude that many individuals simply take a risk that Her
Majesty’s Revenue and Customs will not look into their employment
status, an attitude that is fostered by the decreasing number of
compliance investigations.
123. We recommend that the Contract Review Service be publicised to
greater effect, that Her Majesty’s Revenue and Customs investigate
ways to encourage individuals to use the service and that they look
into ways to bolster confidence in its independence and impartiality.
(Recommendation 8)
Recent reforms: The Business Entity Tests and the IR35 Forum
124. There was a general consensus that there is insufficient guidance provided by
HMRC for those who operate through personal service companies. The
introduction of the Business Entity Tests (BETs) and the establishment of
the IR35 Forum have generally been seen as positive steps in improving
114 Q 28
115 ICAEW
116 Q 61
117 Q 10
guidance and channels of communication with interested stakeholders. We

heard, however, that there is still more to be done.
125. The BETs were published by HMRC in May 2012. The 12 tests are
contained within a document which also includes case studies and an
explanation of the risk based approach that lies behind the tests. HMRC
make quite clear in the publication that the scoring from the completion of
the tests provides an indication of risk, not a concrete judgment on whether
an engagement lies within the IR35 legislation. The tests cover the following
areas: business premises; professional indemnity insurance; efficiency;
assistance; advertising; previous PAYE; business plan; repair at own expense;
client risk; billing; right of substitution; and actual substitution. Each test
asks at least one question and a ‘yes’ answer scores points. Different tests
give different scores and the individual adds up the points at the end of the
tests. A score of less than 10 is categorised as high risk, more than 20 as low
risk and the scores in between as medium risk. The ‘yes’ scores range from
35 for the assistance test to one for the business plan test. The questions
asked in the tests require the individual to look at various features of their
engagements.
126. Some respondents were encouraged by recent attempts on the part of
HMRC to improve administration in this general area. The FCSA felt that
the changes introduced in 2012 were encouraging, with improved guidance,
the focused IR35 helpline, revised organisational approach and the
introduction of the BETs. John Whiting felt that the BETs had had a positive
impact; whilst not offering complete certainty, they allowed contractors to
secure a relatively quick in/out take on IR35:
“My sense is that they have had a positive impact: they do not deliver
absolute certainty to the taxpayer, but that is probably impractical (as
circumstances change). There are also a lot of factors which no doubt
appear complex and long to the personal service companies user but we
are in an involved area. I feel that in the great majority of cases they will
serve to give a quick and reliable ‘in’/‘out’ answer, if approached with
reasonable knowledge of what is going on”.118
127. Since their publication however, the BETs have been met with various forms
of criticism. Although some have expressed how useful they find them in
clarifying which type of contracts are caught by IR35 and which are not,
others have expressed their strong opinion that they simply add another layer
of confusion. The Recruitment and Employment Confederation (REC) told
us that that the tests are ordered so as to necessitate a greater deal of work on
the part of the individual. In their opinion a simple reordering could mean
that on the consideration of the first two tests (the assistance test with a ‘yes’
score of 35 and the actual substitution test with a ‘yes’ score of 20), the
individual is immediately highlighted as being of low risk.119 The BETs have
been discussed in the IR35 Forum but there is disagreement on whether or
how they should undergo substantive reform.
128. Kate Cottrell noted that the BETs were only a test for IR35 risk, rather than
IR35 applicability; this understanding was not always present amongst those
using the tests: “The problem with the business entity tests really is that they
118 John Whiting

119 REC
are being used as a status test. All the business entity tests are actually saying
is, “What is your level of risk of investigation for IR35?”120 This point was
echoed by APSCo who cited their wider use within the public sector:
“If APSCo could change one thing, it would be the business entity tests
… the weighting of those tests means that they are ultimately now not
being used as a risk identifier, which is what they were originally there
for—a filter of risk. We are particularly concerned that within the public
sector, many departments are using the business entity tests as a way of
deciding whether somebody is in or outside of IR35, because of the
guidelines from the Treasury on payroll arrangements”.121
There is certainly room for an increased emphasis on the part of HMRC that
the use of these tests is only to be seen as a guide as to whether a case falls
within the IR35 legislation or not.
129. John Whiting pointed out that the document detailing the tests is not easily
accessible to those who may be searching for it online: “It is instructive to
search HMRC’s site. A search for ‘IR35’ and ‘IR 35’ (i.e. with a space
between IR and 35) returns different things; neither search immediately
turns up the ‘Business Entity Tests’ document”.122 Digital by default as a
wider Government policy was also the subject of discussion, with evidence
being provided that certain groups of people may not be able to access the
necessary information online.123 HMRC told us that work was underway on
this issue in the IR35 Forum;124 there is clearly more work to be done in
making the tests more accessible.
130. Both the FSB and the REC were of the opinion that the BETs have added
more confusion than clarification over whether a contract falls within or
without IR35. The PCG also argued that the tests require revision,
suggesting that they are too sensitive to small changes in the circumstances of
an individual and that the scoring of the tests is unrealistic and unfair:
“I would like to see these tests refined, assuming IR35 is not to be
repealed or suspended. PCG, at the time, proposed a different scoring
methodology, which I think would make things a lot clearer. We
proposed a further six questions on top of those that were adopted,
which, again, I think would be a useful addition. PCG feels very much
that IR35 itself can be refined to a certain extent”.125
131. An alternative approach to case by case examples as provided in the 47 page
BETs document was explained by Professor Judith Freedman, who shared
the Australian approach with the Committee. That system did not receive
unqualified support from Professor Freedman:
“There is an 80% test, so that, essentially, if at least 20% of your work
comes from other than one client, you will have a safe harbour. You
have some definite lines in the sand. However, I do not think it is
working brilliantly well … As soon as you provide a very clear line in the
120 Q 28
121 Q 61
122 John Whiting
123 Q 26 and Q 40
124 Q9
125 Q 55
sand, some people—not everybody—will game that line. There is a

tension between having a very clear rule, which is helpful for the
majority of people, and stopping avoidance. I would not say that the
Australian system is simple. I went to check it before I came here, and
the basic booklet to explain it to people is 64 pages long”.126
132. We were encouraged to hear that HMRC are aware of the dissatisfaction
with the BETs, a view that has been made clear by the work of the IR35
forum,127 and that a review is being considered:
“Feedback has been mixed. Some people say that they find the business
entity tests, which were launched at that time with case studies, useful,
but we have also had a lot of feedback through the IR35 Forum that
people are not happy with them and they are being used wrongly as an
unemployment status test or being manipulated to contrive a score …
[The BETs] were only ever intended to provide a guide to the likely risk
that they would be within IR35 or the risk of having an IR35 compliance
investigation, so they were developed with the IR35 Forum as an
attempt to give contractors greater certainty in IR35, because we were
conscious that one of the criticisms of IR35 was that it caused
uncertainty … When we introduced them, we made it clear on our
website that we were piloting these and that we might come back to
them and update them. Indeed, we are now looking at them again as
part of our review of all the processes that were introduced as a result of
the OTS review. That will include us looking at the business entity tests
to see if they are fit for purpose or whether they could be improved to be
more useful”.128
133. We accept that the guidance will never be able to give absolute
certainty to taxpayers of their status in relation to IR35 but we agree
that the current guidance is far from satisfactory.
134. We recommend that Her Majesty’s Revenue and Customs undertake
a full consultation on how the Business Entity Tests could work better
to provide greater certainty for taxpayers. (Recommendation 9)
135. Views on the IR35 Forum were mixed. John Whiting praised the work of the
IR35 Forum which was founded following the 2012 OTS Small Business
Tax Review. Talking of the collective responsibility that lies at the heart of
improving the BETs, he told us:
“I think it is the responsibility of us all … to get the Revenue, the
Treasury, business representatives and small business advisers working
together—and I think that that remains the way forward on these tests.
If advisers find problems with one or more of the tests, those ought to be
fed in and discussed in the forum, and the tests ought to be refined”.129
136. HMRC told us that they saw the IR35 Forum as invaluable in improving the
service that they offer to the taxpayer:
“One of the things that we are doing through the IR35 forum—in truth,
possibly for the first time—is trying to see matters from the taxpayer’s
126 Q 28
127 Q9
128 Q9
129 Q 17
perspective, and we are doing that through members of the Forum who
represent the accountancy profession, contractors themselves and the
recruitment sector. We are asking them how their members, or their
accountancy bodies, feel we are communicating people’s tax obligations
and reporting requirements, and we are trying to amend our guidance,
and possibly in due course even the wording on our statutory returns,
accordingly to try to make things easier for people to understand”.130
We were also interested to hear that HMRC are working with the IR35
Forum to investigate why the completion rates on the various tax returns are
so low,131 a problem which is addressed by some of our earlier
recommendations.132
137. The ACCA saw the Forum as a positive step forward, but suggested that the
work of the group was constrained by its terms of reference. In their view,
limiting discussion to IR35 meant that wider, relevant issues about personal
service companies more generally could not be addressed. The ICAEW
thought that the Forum worked well in developing new guidance, but that
the work of the group was limited by the poor body of legislation within
which it was working.
138. Despite the positive attitude of HMRC, a number of written submissions
reported an element of resistance.133 The REC explained that, within the
forum, they had consistently requested that the BETs be updated and that
the associated guidance be improved, but had seen no change in HMRC’s
approach. The IIM felt that the Forum should have a wider stakeholder
membership and that there should be a greater level of assurance that topics
discussed had been taken on board by HMRC. The PCG felt that the Forum
had failed to produce meaningful change and that, more generally,
deliberations were hampered by a lack of data availability from HMRC.
David Ramsden from the FSB echoed this sentiment:
“I too sit on the forum, and I have to say that I get the distinct
impression that the Forum is there, largely, as a box-ticking exercise. It
would not be if HMRC took any notice of what the external members of
the Forum had to say”.134
139. We commend the motive behind establishing the IR35 Forum as an
opportunity for wider stakeholder engagement.
140. We recommend that Her Majesty’s Revenue and Customs go to
greater lengths to demonstrate that they are receptive to the feedback
that is provided through this group and that they review the breadth
of membership. (Recommendation 10)
130 Q 11
131 Q 118 and Q 124
132 Recommendations 3–6.
133 AAT and CIPP
134 Q 61
CHAPTER 5: IMPLICATIONS FOR THE LOWER-PAID

141. The use of personal service companies is often associated with high-skilled,
higher paid professions. Much of the analysis presented elsewhere in this
report considers the use of personal service companies by freelance
professionals such as senior executives, IT software development specialists
and oil industry engineers.
142. Our evidence suggested that the use of personal service companies was not
limited to these relatively well-remunerated professions. We were told that
receptionists, office workers, credit controllers, healthcare workers,
telephonists and cleaners had been asked to provide their services through
personal service companies.135 ACCA stated that HMRC enquiry work had
established that there was a “significant problem” with abuse of corporate
forms in the lowest paid sectors with engagers in the hospitality sector, for
example, looking to establish chamber maids in their own personal service
companies.136 HMRC stated that personal service company use extended
across all income ranges and across all sectors.137
143. The use of personal service companies across a diverse range of sectors and
income levels can, in some part, be considered a consequence of the growth
of the flexible workforce in the UK. The FCSA told us that the flexible
workforce totals between 1.5 million and 2 million workers;138 the Office for
National Statistics (ONS) estimates139 that 4.37 million people in the UK are
self-employed, and that there are just over 1.6 million temporary workers in
the UK.140 The flexible workforce extends from low paid, low skilled people
at the one end, to highly paid, highly skilled individuals trying to run a
business on their own account at the other end.141 The CBI gave the
following explanation for this growing phenomenon:
“As we saw in the debate about zero hours contracts, which is another
form of labour flexibility, part of that growth is about companies being
unable to predict demand. A second potential structural point is that
companies are increasingly feeling competitive pressure across a large
number of sectors. One of the ways in which companies have looked to
allow for that competitive pressure is to align more closely labour input
to demand, and clearly more flexible forms of employment allow that. I
do not think it is a surprise that we have seen a growth in flexible forms
of employment generally”.142
144. There has been little analysis of the different forms of flexible employment.
Whilst we received evidence that some lower paid individuals are engaged
135 Angela Williams, written evidence and Frances Corrie (Q82).

136 ACCA
137 Q 123
138 Q 48
139 Figures for October to December 2013 (published in February 2014). See:
http://www.ons.gov.uk/ons/dcp171778_350998.pdf
140 Ibid.
141 FCSA
142 Q 94
through personal service companies, we were told that the number of such
people engaged through limited companies had fallen since the
implementation of the managed service companies (MSC) legislation in the
Finance Act 2007.143
145. Martin Hesketh of the FCSA told us that the managed service companies
legislation had changed the working structures of “tens of thousands” of
people, by ensuring that those working through limited companies have to
take on directly the responsibilities of ownership, directorship and
management. The net result of this had been to push low paid individuals—
who did not want or were not able to manage these responsibilities—out of
the limited company arena.144 The ICAEW and Contractor Calculator
echoed this view.145
146. Lower paid people are, of course, prominent amongst the flexible workforce.
Umbrella companies figured significantly in the evidence that we heard.
They provide a vehicle through which members of the flexible workforce can
offer their services without having to incorporate individually. The umbrella
manages invoicing, payroll and contract matters, and pays the worker via
PAYE. The individual is employed by the umbrella, rather than the end-
client. Individuals are given an over-arching contract of employment, which
allows them to work in different positions, with different end-clients.
147. Frances Corrie, of TaxAid, a charity that helps people on low incomes with
their tax affairs, told us that she dealt with significant numbers of lower paid
individuals who were engaged through umbrella companies. Example
occupations included security guards, couriers, drivers, cleaners and chefs.146
148. Agencies also figured prominently here; we heard that agencies provided
workers through a variety of engagement methods, including personal service
companies. Often, agencies worked alongside umbrella companies to deliver
flexible workers, with the agency liaising with and sourcing end-clients and
the umbrella paying wages, PAYE and managing invoices. The Institute of
Chartered Accountants of Scotland (ICAS) told us that there was
“widespread referral of low paid workers to umbrella companies by
agencies”.147
149. The evidence we received identified issues surrounding the circumstances in
which lower paid individuals are engaged—whether through personal service
companies, umbrellas or by agencies. The remainder of this Chapter
considers the extent of these complex problems.
Issues for the lower paid
Reduced entitlements
150. It is clear to us that where lower skilled workers within the flexible workforce
are employed through the use of corporate forms, including both personal
143 See Chapter two for more detail on the managed service companies legislation.
144 Q 48
145 ICAEW and ContractorCalculator
146 Q 82
147 ICAS
service companies and umbrella companies, they generally have lower

entitlements compared with those in permanent employment.
151. The Low Incomes Tax Reform Group (LITRG) suggested that the scope for
potential exploitation was considerable, noting that many migrant workers,
who are often unclear about their rights and responsibilities, find themselves
providing their labour through corporate forms.148 This work was often
delivered through umbrella companies, working with agencies, although the
LITRG had also seen personal service company use promoted on the
internet, with some advertising of personal service company use “clearly
aimed at migrant workers”, offering to provide a UK registration address and
mail forwarding service.149
152. The National Association of Schoolmasters Union of Women Teachers
(NASUWT) told us that the overwhelming majority of supply teachers
deliver their work through agencies and umbrella companies. They were
clear in their view that the main beneficiaries from these arrangements were
the agencies and umbrellas themselves, rather than the individuals engaged
through them, concluding that “we feel there are groups of workers here that
are being quite seriously exploited”.150
153. The issues at play differ slightly, depending upon which intermediary vehicle
is used. For any low-paid individuals using a personal service company, the
drawbacks would be much the same as they would for a professional
contractor; lack of holiday pay, sick pay, paid training and the absence of
various rights and protections such as maternity leave and working time
protections. It is unlikely that these individuals would benefit from workplace
pension provision. Whilst these are features of a non-permanent workforce,
there would be an issue of exploitation if the individual in question was
unaware of these consequences and had been pushed into the personal
service company arrangement without any proper alternative being made
available.
154. Individuals engaged through an umbrella company would benefit from many
of the statutory rights and entitlements mentioned above, as they would have
a contract of employment with the umbrella. These rights and entitlements
would be more than those available if a personal service company were used
but would typically be less than those available in a conventional
employment relationship. They would, however, be exposed to a slightly
different set of issues. One such problem is the potential over-inflation of tax
deductible travel expenses, which might be encouraged by the umbrella and
for which the individual might be liable if subjected to a HMRC
investigation. This is discussed in more detail in paragraph 174 below.
155. Other issues cited included the charging of fees for the work of the umbrella
company, which were debited from the salary of the individual,151 gaps in
National Insurance contribution records152 and employers’ National
Insurance contributions being deducted from gross amounts available to pay
148 LITRG
149 Ibid.
150 Q 82 and NASUWT
151 Cited by LITRG, AAT, CIPP and Sue Christensen, all in written evidence.
152 LITRG
salaries.153 The documentation associated with engagements through

umbrellas and agencies did not always clearly set out gross pay rates,
contributions and fees, inhibiting awareness of these potential issues.154
The issue of awareness

156. The ICAEW told us that, whilst higher paid individuals may choose to
deliver their services through a corporate form, there were many more lower
paid individuals who had little choice over the matter and who were
compelled to operate through a personal service company or an umbrella.155
HMRC acknowledged this, stating: “We are seeing a number of cases where
personal service companies are being used at low income levels and, indeed,
that people are being—for want of a better term—pushed into these service
companies”.156 It is important to note that we saw limited evidence of this
push coming from the end-clients themselves; instead, it appeared that any
pressure to work in this way came mainly from employment agencies through
which the individuals sought work.157
157. We were told that some individuals were being forced into delivering their
labour through vehicles which they didn’t fully understand, with the reality of
the situation only becoming apparent when the worker seeks to access
benefits or exercise rights.158 John Whiting told us that “the unadvised, or the
person who is forced into a personal service company or umbrella route, is
another matter. They may be hazily aware of something lurking but may not
appreciate the full impact”.159
158. These individuals can sometimes become confused when it comes to
determining by whom they are actually employed. Neil Carberry, of the CBI,
told us that there were issues in parts of the labour market with employees
and workers not understanding the status on which they had been
engaged.160 Frances Corrie explained that: “The confusion increases because
often, particularly at the perhaps less educated end of the labour market that
we see, if you ask people who they are working for they would name their
end user. That is where they work”.161
159. The LITRG told us that the documentation and payslips associated with
flexible employment structures for lower paid individuals were often
complex, compounding the issues caused by a general lack of information
and clarity.162
160. We believe that these issues are a cause for concern. It is apparent that some
individuals are engaged in or through corporate forms which they don’t fully
understand and that, in some cases, to engage in this way may not entirely
have been the choice of the individual concerned. This lack of awareness
153 ICAEW, LITRG and NASUWT

154 Q 84
155 ICAEW
156 Q 123
157 This is in part due to the Agency Regulations, discussed in Chapter two of this report.
158 Angela Williams
159 John Whiting
160 Q 96
161 Q 83
162 LITRG
gives rise to the opportunity for potential exploitation by end-clients and the
operators of umbrella companies and other intermediaries. In addition, it is
possible that the individuals concerned are unaware of their potential
exposure to issues relating to statutory entitlements, pensions and
employment rights; for many, the distinction between employment and
engagement is unclear. The fact that employment law does not always
directly equate to tax law makes the situation still more complex to the
uninitiated.
161. Solutions to these complex issues are not immediately obvious. The LITRG
told us that a small number of well targeted investigations into the purveyors
of schemes would make a difference.163 It was also suggested to us that
understandable, concise, information about the differences between
employment and self-employment should be made available to all individuals
working in industries where intermediary vehicles were prevalent.164
162. The production of such information would not be without difficulty, given
the complex nature of the subject matter and the reliance on case-law for
drawing distinctions between employment statuses. The IoD raised the issue
of complexity noting that, whilst engagers could have a responsibility for
ensuring that any such guidance was passed on to individuals, the onus
should be on HMRC to determine what the guidance should contain.165
163. We are concerned that, in some sectors, individuals who are
providing their services through personal service companies or, more
often, umbrella companies and agencies, have a limited awareness of
how they have been engaged to provide their work and who it is that
has engaged them. This may mean that the individuals are not aware
that they have foregone at least some levels of employment protection
and benefits to which they would be entitled if they were in
conventional employment. We recognise the complexity of the subject
matter, and of the case law underpinning some of the distinctions
made, but believe that it ought to be possible to present these issues in
a concise and understandable manner.
164. We recommend that the Government should develop and publish a
short guide setting out the basic differences between employment and
self-employment. The guidance should be published across multiple
platforms, including both digital and paper, and should be made
available to individuals working in all industries where intermediaries
are prevalent. (Recommendation 11)
A role for the Low Pay Commission?

165. A major issue hindering any attempt to propose solutions to the issues raised
in this Chapter is the lack of clear robust information and analysis about the
scale of the problem. Estimates for the flexible workforce in general are
available (see paragraph 143) but, as detailed previously, this is not a
homogenous group and will include individuals at the higher end of the
income spectrum, as well as those who are lower paid.
163 LITRG
164 Ibid.
165 Q 96
166. Major employers from whom we heard had little detailed knowledge about
the circumstances of flexible workers at the lower end of the income scale.
Almost all used agencies to secure such labour, but were usually unclear
about the methods of engagement used between the agencies and the
workers they provided.166
167. HMRC admitted that they were unclear on the true extent of low paid
individuals who might be engaged specifically through personal service
companies, stating that they “do not have enough information on the
numbers of people at the lower salary level to come to a view as to our best
strategy”.167 HMRC acknowledged that there may be circumstances in which
lower paid individuals, engaging through personal service companies, did not
understand the implications for statutory entitlements and, also, where the
liabilities for tax and National Insurance might fall.168
168. We asked HMRC what more they could be doing to tackle any exploitation
of lower paid individuals engaging through personal service companies. They
took the view that, in some of these cases, the engagements might actually be
through managed service companies, rather than personal service companies
and, if that were the case, the managed service companies legislation should
apply. For those affected who were engaged through personal service
companies, HMRC suggested that they needed to develop a communication
strategy that raised awareness of the issues involved. These approaches came,
however, with a caveat that more information was required before HMRC
could determine the best route forward. 169
169. We believe that the Low Pay Commission (LPC) could have a role to play
here. The LPC is an independent, statutory, Non-Departmental Public Body
set up under the National Minimum Wage Act 1998 to advise the
Government on the national minimum wage and related matters. The
Commission’s stated goal is to recommend “levels of the various minimum
wages which help as many low-paid workers as possible without any
significant adverse impact on employment or the economy”.170
170. The Commission produces an annual report, the principal purpose of which
is to make recommendations about future minimum wage levels. This report
takes its lead from an annual remit for the Commission, issued by the
Secretary of State for Business, Innovation and Skills. The remit can request
the Commission to include, in its report, advice on particular areas of
concern or interest.
171. We believe the developing use of corporate intermediaries to engage lower
paid individuals in work is worthy of examination by the LPC. The
Commission has the capacity and wider expertise to produce more detailed
analysis of the effects of the use of personal service companies, umbrella
companies and agencies on the circumstances of lower paid workers. This
analysis would help to inform HMRC’s approach, which currently suffers
from a lack of detailed knowledge. Furthermore, the issues around
exploitation and lack of understanding around employment rights that we
166 Amey plc, LGA, NHS Trust Development Authority, GSK and Crossrail.
167 Q 123
168 Ibid.
169 Ibid.
170 LPC Business Plan, 2013–14.
have discussed in this Chapter are likely to have contextual relevance for
consideration of the national minimum wage.
172. We recommend that the Government includes within the remit of the
Low Pay Commission a consideration of the use of personal service
companies and umbrella companies by lower-paid workers, and the
implications for pay, employment rights and statutory entitlements.
(Recommendation 12)
Expenses and enforcement

173. We were told that umbrella companies play a vital role in the supply chain
for flexible labour171 and that, operated correctly, they provide an efficient
form of tax collection from this element of the workforce.172
174. We also heard, however, a significant amount of evidence concerning the way
in which umbrella companies managed the expenses of those engaged
through them. If an individual working for an umbrella company is engaged
on an over-arching contract of employment they are able to claim tax
deductible travel expenses covering journeys from home to work. Umbrella
companies are able to apply for and operate an expenses dispensation, which
allows them to omit relevant expenses from their annual benefit in kind
(P11D) returns to HMRC.
175. The LITRG suggested that individuals are often encouraged into the use of
umbrella companies by the promise of greater levels of take home pay. They
contend that these levels are, in fact, generated by understating taxable pay
and overstating tax deductible expenses. Any understatement of pay could
lead to a reduction in the value of National Insurance contributions, to the
potential detriment of an individual’s long term pension entitlements.
176. A number of respondents to our call for evidence raised issues with the
manner in which umbrella companies managed expenses dispensations.
These included Professional Passport, Sue Christensen (a Partner at Sue
Owen Accountants), the AAT and the CIPP, ICAEW, the PCG and the
LITRG. The NASUWT told us that they were aware of these issues.173
177. HMRC acknowledged that abuse of expenses dispensations by umbrella
companies was taking place. They stated that the taxing obligation in these
cases would rest with the umbrella company and that, as such, HMRC
would seek any tax or National Insurance from the umbrella, rather than the
individual worker.174 Provisions exist, where appropriate, for recovering
money personally from the officers of a company, or for transferring liabilities
for National Insurance owed to a director of the company concerned.
178. This approach is not reflected in some of the wider evidence that we heard.
The LITRG suggested that any investigation into expense abuses by HMRC
is likely to result in penalties or problems for the worker, rather than the
umbrella company.175 Professional Passport suggested that when umbrella
companies had, in the past, been found to be non-compliant, there had been
171 G4S plc

173 Q 85
174 Q125
175 LITRG
“numerous examples where the umbrella shuts its doors and walks away
leaving HMRC holding all the losses”. They also stated that they were not
aware of any action taken against directors personally to recover any of these
losses.176
179. The NASUWT had little faith in HMRC’s description of their approach,
stating:
“We have had some quite astonishing advice from HMRC … where
HMRC said that if that were done it would not be the responsibility of
the individual, it would be the responsibility of the umbrella company. I
cannot see a circumstance in which somebody who is claiming expenses
they have not had does not have some personal liability for this”.177
180. It is widely acknowledged that some umbrella companies are abusing the
expenses dispensations that HMRC allow them to operate. HMRC are aware
of this issue and have set out clearly their approach to tackling it, although it
is apparent that some confusion as to where liability for any under-payment
of tax or National Insurance lies continues to exist. It is possible that this
liability might vary, according to the circumstances of individual cases.
Notwithstanding this, HMRC must act to ensure that these abuses are
uncovered, addressed and deterred through action.
181. As it is clear from the evidence that abuse of the expenses
dispensations operated by umbrella companies is taking place, we
recommend that Her Majesty’s Revenue and Customs ensure that
enforcement action is taken to end these abuses and to ensure that
expenses dispensations are managed correctly. (Recommendation 13)
182. We also recommend that Her Majesty’s Revenue and Customs should
review its processes for granting and renewing expenses
dispensations, in order to ensure that potentially high risk
organisations are granted dispensations only when appropriate.
(Recommendation 14)
183. The operation of a personal service company allows for expenses to be set
against taxable income. This could, potentially, be another source of abuse.
We asked HMRC about this issue, and were told that there was no evidence
of widespread abuse of expenses rules by personal service companies.178 We
received no substantial evidence that challenged this position.

177 Q 85
178 Q 125
CHAPTER 6: THE PUBLIC SECTOR

184. The use of personal service companies (and other ‘off-payroll’ arrangements)
by the public sector came to prominence in 2012 following a Freedom of
Information request concerning the appointment of the Chief Executive of
the Student Loans Company. The Chief Executive was first appointed on an
interim basis in May 2010; a subsequent 2-year contract was finalised in
December 2010, following a competitive recruitment process. Both of these
appointments were made through the Chief Executive’s personal service
company.
185. On 31 January 2012, following media coverage of this case, the Chief
Secretary to the Treasury, the Rt Hon. Danny Alexander MP, commissioned
a review to examine the extent of off-payroll arrangements in central
Government.179 The aim of the review was to ascertain the extent of
arrangements which could allow public sector appointees to minimise their
tax payments, and to make appropriate recommendations. The review found
that 2,400 staff earning more than £58,200 a year were engaged off-payroll
in central Government and arms length bodies. Senior management
positions accounted for around 5% of these cases.180
186. The review was published on 23 May 2012. At the same time, the Chief
Secretary announced various changes to departmental practice when ‘off-
payroll’ appointments were agreed.181 These included:
 A presumption that the most senior staff must be on the payroll, unless
there are exceptional temporary circumstances. Any such circumstances
would require Accounting Officer sign-off, and can last no longer than six
months.
 For appointments of contractors lasting longer than six months and
costing over £220 per day, all Government departments must be able to
seek formal assurances that income tax and National Insurance
obligations are being met. Departments should terminate the contract if
such assurances are not provided.
 Any department found to be non-compliant with these new rules faced
being ‘fined’ up to five times the cost of the salary by the Treasury.
187. These rules were formalised in Procurement Policy Note (PPN) 07/12,
published by the Cabinet Office in August 2012. The PPN sets out
illustrative contract clauses which allow assurances about tax arrangements
to be sought; these were to be inserted into all new contracts (and contract
renewals) from August 2012. The PPN also sets out a process, with
guidance, for seeking assurances on tax and National Insurance from
contractors. The scope of the PPN is outlined as “all central Government
departments, including their executive agencies and Non Departmental
Public Bodies”.
179 The review considered ‘off-payroll’ arrangements as a whole and was not, therefore, limited solely to
personal service companies HC Deb 2 February 2012 cc 1001–2.
180 HC Deb, 23 May 2012 cols 1159–60.
181 Ibid.
188. In considering the use of personal service companies in the public sector, we
were keen to understand the extent to which the Treasury Review had
provided a comprehensive understanding of personal service company use
across the sector, and the extent to which the Treasury Guidance, and PPN
07/12, had been implemented and taken effect. We began, however, by
considering the broader principle of public sector use of personal service
companies.
The principle of public sector use of personal service companies

189. Our Call for Evidence asked the following question:
“To what extent are personal service companies still used in the public
sector? Should those engaged in public bodies and similar organisations
be prevented from working through a personal service company? If so,
would the public sector experience difficulties in obtaining the skills and
expertise that are needed?”
190. We were told that public sector use of personal service companies typically
fell into three categories. These were for interim management appointments,
for time-limited project roles (particularly for IT infrastructure development
projects) and for roles that had temporary or time-limited grant funding.182
HMRC told us that they currently had eight workers engaged through
personal service companies; all eight were occupational psychologists.183
191. We consistently heard that any blanket restriction on public sector use of
personal service companies would be unhelpful. The REC suggested that the
public sector might require highly skilled, flexible labour to carry out project
work in much the same way that many private sector businesses require
additional skills and capabilities from time-to-time. The IMA suggested that
personal service companies are widely used for flexible deployment of people
within the public sector, and that restrictions on their use would lead to
escalating labour and recruitment costs.
192. This view was echoed by the PCG:
“The use of ‘personal service companies’ within the public sector is vital
to the successful and efficient delivery of public services … Freelancers
provide a way for the public sector to engage specialists with experience
outside the public sector on a short term basis, without the associated
costs of full employment. Any blanket restriction on the ability of public
sector bodies to acquire the services required in the most cost-effective
manner risks being clearly detrimental to the value-for-money delivery of
public services to the taxpayer, if the impact of the commercial strait-
jacket effectively imposed is disproportional to the impact on tax”.184
193. We were told that personal service companies in the public sector were
largely used to meet the same needs as those met by personal service
companies in the private sector; as such, it was considered that the public
sector would be disadvantaged by any ‘tougher’ rules on their use. The BBC
told us that:
182 QQ 63–65, evidence from LGA and DoH.

183 Q8
184 PCG
“The growth of the flexible workforce in the UK cuts across all work
requirements, from large creative IT projects to project management of
infrastructure requirements. These are as applicable in the public sector
as well as the private sector and there is no reason to create different
‘legislation’, either disadvantaging or creating an advantageous
environment for either sector. The legislative framework should be
applied consistently, irrespective of the funding of the engager”.185
194. This view was echoed by the ICAEW and the Giant Group, amongst others.
The IIM expressed a similar view, but noted that Government departments
need to understand when off-payroll appointments are appropriate, and
when they are inappropriate.
195. We acknowledge that there will be circumstances in which public
sector organisations, just like private sector organisations, may need
to acquire services from those who operate through personal service
companies. For this reason, we believe that any blanket restriction on
public sector use of personal service companies would not be
beneficial to the delivery of public services.
The limitations of the Treasury Review

196. We were told that the Treasury Review had identified some cases of personal
service company use within the public sector where IR35 should historically
have been applied but had not been. Bauer & Cottrell told us that:
“The assurance exercise brought to light many cases that were very
clearly inside IR35 but the individuals had been declaring an outside
IR35 position. Some of these engagements had been going on for many
years … Many knew that they should have been treating themselves as
IR35”.186
These views were echoed elsewhere. The IIM told us that the review had
“revealed that some engagements of personal service companies in the public
sector had been in place for 10 years” and that this “appears to represent a
failure on the part of Government departments to understand in what
circumstances the use of off-payroll staff is appropriate and, more
importantly, when staff should be on the payroll”.187
197. We also heard that the process of, and publicity around, the review had
helped to raise awareness of the issue of off-payroll engagements, even in
those parts of the public sector not directly affected by the review. Michael
Coughlin, of the Local Government Association (LGA), told us that, whilst
local councils were excluded from the review, the LGA and other partners
had sought to promote the resulting guidance to local authorities. Mr
Coughlin stated that: “although it does not directly apply to the local
government sector it has had an impact by default in the way it has been
promoted and distributed through councils across the country”.188
185 BBC
186 Bauer & Cottrell
187 IIM
188 Q 68
198. This evidence suggests that the Treasury Review has helped to encourage
some greater degree of awareness within the public sector about good
practice when engaging personnel off-payroll.
199. We do not, however, believe that the Treasury Review provided a
comprehensive assessment of public sector use of personal service
companies. The Review considered only central government and its arm’s
length bodies and did not directly include local government, parts of the
National Health Service (NHS) and other parts of the public sector. This
was identified as a limitation by a number of respondents to the Committee’s
Call for Evidence; a similar conclusion was made by the House of Commons
Public Accounts Committee in September 2012.189
200. In addition, the Treasury Review only considered workers who were engaged
on a rate of £220 per day or more (approximately £58,200 per annum,
potentially). This compares with median gross annual earnings in the UK
which are currently around £27,000.190
201. We sought evidence on the extent of personal service company use in local
government. Whilst local government was excluded from the scope of the
review, the LGA had sought to promulgate the guidance to its 351 member
authorities, and had sought voluntary information on personal service
company use in the sector. This information suggested that between 5 and
10% of local authorities were engaging people through personal service
companies and that, in each of these, between one and five individuals were
engaged in this way. These were typically interim management
appointments, IT specialists or short-term project specialists. These figures
applied only to those earning more than £50,000 per annum.191
202. The figures provided by the LGA were estimates, and covered by a number
of caveats. It was clear to the Committee that, whilst the LGA had sought to
take a responsible approach in promoting the Review and subsequent
guidance to the local authority sector, no comprehensive figures for personal
service company usage in local government are available. This reflects the
fact that local government is not subject to the same degree of central control
as central government and that the LGA is a body which serves its local
authority members but does not direct them.
203. We also considered the use of personal service companies in the NHS. We
were told that, whilst the required scope of the Treasury Review was to
consider all workers engaged on £220 per day or more, the Department of
Health (DoH), in implementing the review, had restricted the survey to staff
at Board level only. This was “because of the very large numbers of NHS
organisations and staff”.192
204. This survey—conducted in early 2012 and limited to Board-level staff in
NHS Trusts, Foundation Trusts, Primary Care Trusts and Strategic Health
Authorities—found that fewer than 2% of such appointees were engaged off-
payroll. Specific figures for personal service company usage were not
available, though “it was apparent that a significant number of executive
189 Committee of Public Accounts, Off-payroll arrangements in the public sector: (12th Report, Session 2012–13,
HC 532).
190 ONS, Annual Survey of Hours and Earnings, 2013 provisional results.
191 Q 63
192 DoH
directors were engaged through personal service companies, including up to

eight Chief Executives”.193
205. Whilst recognising the complexity of health service structures and providers,
and the difficulty and potential cost of surveying all parts of the NHS, we
believe that this work could have gone further. We do not believe that the
Treasury Review has provided a comprehensive assessment of personal
service company usage in the public provision of health services.
206. We received further evidence that ‘off-payroll’ arrangements were being used
more widely in the public sector. The NASUWT told us that such
arrangements had grown exponentially in recent years, particularly for the
provision of supply teachers.194 This reflects the changing nature of education
providers in the state sector with more providers independent of local
authority control and less use by local authorities of an employed pool of
supply teachers. These teachers, whilst not employed by the schools or local
authorities in which they worked, were usually employed by umbrella
companies. Personal service companies did not appear to be used.
207. Bauer & Cottrell, however, told us that they regularly came across personal
service companies engaged as social workers, within the NHS and in
teaching, and that numerous roles within local authorities were filled with
personal service company users.195 It is likely that many individuals in these
professions would earn below £58,200 and would, therefore, have been
excluded from the Treasury Review. We sought details of the extent to which
those at the lower end of the pay spectrum might be engaged using personal
service companies, or other off-payroll arrangements. Neither the LGA or
the DoH was able to provide such details; both suggested that individuals at
this end of the income scale were more likely to be engaged via agencies, but
did not provide information about the precise employment circumstances of
these individuals.196
208. It is clear, therefore, that the Treasury Review of off-payroll appointments
had a number of limitations. The review excluded workers earning less than
£220 per day. We consider this to be a significant shortcoming. The Review
was also limited to Government departments and their Non-Departmental
Public Bodies; major areas of public sector service provision sit outside this
scope. These shortcomings have been highlighted in earlier reviews; in our
work, we have seen little evidence that they have been addressed in the
intervening period.
209. The Treasury Review of off-payroll appointments provided only a
limited assessment of the extent of such engagements; large areas of
public service provision, such as local government and some health
services, were not included in its scope.
210. We recommend that the Government carry out an assessment of the
extent to which off-payroll engagements are used elsewhere in the
public sector, including by those earning less than £58,200 per annum.
(Recommendation 15)
193 Ibid.
194 NASUWT
196 QQ 63–65
211. Another public service provider exempted from the Treasury Review was the
BBC. The BBC was subject to some earlier criticism resulting from the use
of personal service companies to engage both on air talent and flexible
workers; in 2012 the Corporation told the Public Accounts Committee that
they had identified 25,000 off-payroll contracts, including 13,000 contracts
for ‘talent’.197
212. We were told that the BBC “used to have a practice of requiring members of
its flexible workforce to engage via a personal service company in certain
circumstances”, but had now agreed a new framework and employment
status tests, with HMRC, that were applicable for the broadcasting
industry.198 As a result, this practice had been changed, and personal service
companies were only used when the work undertaken would support self-
employment status. We welcome the flexible approach demonstrated by
HMRC in working with the BBC to develop specific employment status tests
for this sector; the framework and tests developed with the BBC should be
made more widely available.
Implementing the new guidance

213. The guidance set out in Procurement Policy Note 07/12 was introduced in
August 2012. In a report on off-payroll appointments published in
September 2012 the House of Commons Public Accounts Committee
concluded that there was “insufficient clarity on how government will
implement the Treasury Review’s recommendations” and that there “is a risk
that Treasury guidance may be interpreted inconsistently across the public
sector”.199
214. We heard evidence which suggested that this prediction may have come to
pass. We were told that application of the guidance had not been consistent
across, or even within, departments. Bauer & Cottrell suggested that there
was a “complete lack of consistency across Departments” and that “some
followed the guidance to the letter, some had the default approach that all
personal service companies are within IR35 and some did not undertake the
exercise at all”.200
215. We received further evidence to support this view. The FCSA told us that
they had experience of public sector organisations “completely
misunderstanding” the requirements of the new guidance. They suggested
that some public sector bodies thought that the Business Entity Tests could
be used to definitively determine employment status; this experience was also
shared by the PCG. The PCG were of the view that recent moves within the
public sector to reduce the number of off-payroll appointees had led to
“widespread confusion”.201
216. The DoH set out some of the difficulties involved in implementing the
guidance:
“Some organisations found this guidance relatively complex and in some
cases experienced difficulty obtaining advice from HMRC. HMRC
197 Committee of Public Accounts, 12th Report of Session 2012–13, Op.Cit.

198 BBC
199 Committee of Public Accounts, 12th Report of Session 2012–13, Op.Cit.
201 FCSA and PCG
officials were not all well informed about the HMT review … There is
no doubt that many NHS organisations find the IR35 legislation
complex and difficult to interpret and implement. We in the Department
of Health also found difficulty obtaining help with this from HMT and
HMRC”.202
217. The new guidance required all Government departments to put in place
provisions that allowed them to seek formal assurances that anyone paid over
£220 per day and employed off-payroll for more than six months is satisfying
their income tax and NIC obligations in full. Gordon Fleck, from the DoH,
told us that this “means that there is now much greater confidence that
people employed off payroll in the NHS are in fact meeting their proper
obligations for tax and national insurance”.203
218. We would question, however, the extent to which this is the case. Within the
NHS alone, there is evidence of inconsistent application of, and adherence
to, the guidance. In June 2013, at the request of HMT, the DoH undertook
a further survey of the NHS to assess compliance with the earlier guidance.
This identified 2,403 off-payroll engagements in the NHS—more than the
total identified in the January 2012 exercise. It also identified 148 cases
where assurance regarding tax and NICs had been requested but not
received.204
219. The NHS Trust Development Authority wrote to NHS Trusts on 6
September 2013, asking Trust Chairs to remedy all cases of non-compliance
with the Treasury guidance. The Committee received evidence to suggest
that there has been some progress in the situation since September 2013.205
220. NHS Foundation Trusts, however, enjoy a greater degree of autonomy. The
Secretary of State has the legal power to direct NHS Trusts, but cannot
direct Foundation Trusts; the arms length body Monitor regulates
Foundation Trusts. The June 2013 survey found that 65 Board members or
senior staff with significant financial responsibility were engaged off-payroll
in Foundation Trusts. This included two chief executives, one of whom was
engaged through a personal service company. The survey also stated that
there were 99 cases, across 24 Foundation Trusts, where assurance regarding
tax and NIC obligations had not been received.206
221. In September 2013 Monitor was asked, by the Secretary of State for Health,
to investigate this non-compliance with the guidance by Foundation Trusts.
We received an update on this work in March 2014; this stated that the
number of off-payroll Board members or senior staff with significant financial
responsibility now stands at 41.207
222. It is apparent that, within the DoH, the guidance has not, thus far, enjoyed
universal success in providing assurance that those engaged off-payroll are
meeting their tax and NIC obligations. We were told that the DoH intends to
work with HMT, the NHS Trust Development Authority and Monitor to
202 DoH
203 Q 69
204 DoH
205 Ibid.
206 Ibid.
207 DoH, supplementary written evidence.
develop new guidance on off-payroll engagements and to clarify areas that

have caused confusion or uncertainty.208
223. PPN 07/12 stated that HMT and Cabinet Office would carry out a
monitoring process in April 2013, requesting information on the number of
off-payroll engagements for those earning over £220 per day that have lasted
longer than six months, and the extent to which assurances on tax obligations
have been sought and obtained for these appointments. In addition,
Departments were asked to include, within their 2012/13 annual report and
accounts, details of the outcome of applying PPN 07/12 to existing contracts.
A written statement, summarising monitoring activity, was published in
March 2014.209
224. Whilst this monitoring activity is to be welcomed it is clear, from the
evidence that we have received, that different Departments have taken
different approaches to implementing the guidance, and that the guidance
has not enjoyed universal application and success across Government.
225. Whilst recognising the complexity of the task, we are concerned that the
implementation of PPN 07/12 appears to have been inconsistent, both across
and within Departments. The guidance is already limited by its scope, which
includes only higher levels of pay and limited parts of the public sector.
Inconsistent application further limits its scope, and confusion around how it
should be applied—both within Departments and within HMRC—runs the
risk of undermining any future evaluation of the success of this initiative in
encouraging tax compliance amongst off-payroll appointees in the public
sector.
226. As the guidance embodied in Procurement Policy Note 07/12
currently appears to be applied inconsistently across departments, we
recommend that Her Majesty’s Treasury take a leading role in
ensuring consistency of application and that it should go to greater
lengths to monitor the implementation of the Procurement Policy
Note 07/12 guidance across Government departments.
(Recommendation 16)
208 Ibid.
209 HL Deb, 11 March 2014, col WS175.
SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS

1. We recommend that Her Majesty’s Revenue and Customs carry out and
publish a detailed assessment of the current Exchequer protection figure and
of the costs that taxpayers incur in dealing with IR35. This should enable a
better assessment of whether the legislation is having the intended effect and
is proportionate. (Recommendation 1, paragraph 73)
2. 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.
3. Moreover, we note that compliance with the rules can demand a great deal of
time and effort on the part of contractors. We acknowledge that it can be
difficult for individuals contracting through personal service companies to
define their tax and National Insurance position quickly and accurately
because of the contract-by-contract nature of IR35 and the need for a sound
understanding of case law.
4. We believe that the abolition or suspension of the IR35 legislation as
proposed by the Office of Tax Simplification, whilst attractive, would be
unwise if the legislation has the Exchequer protection effect claimed for it by
Her Majesty’s Revenue and Customs.
5. The current structure and rates of income tax and National Insurance
provide an incentive for taxpayers to arrange their financial affairs in order to
minimise the amount of tax and National Insurance paid. This has lead to
complex legislation, such as IR35, to counter such arrangements.
6. Whilst we recognise the complexities in merging income tax and National
Insurance and the effect that this may have on the contributory principle, we
recommend that the Government re-examine the longer term case for
combining taxes on income and National Insurance. (Recommendation 2,
paragraph 89)
7. We acknowledge that businesses would generally resist being made
responsible for IR35 assessment, finding the additional administrative
pressure and liability as overly burdensome.
8. We recommend that Her Majesty’s Revenue and Customs look again at
whether they require complete and accurate responses to the “service
company” questions on the personal tax return SA100 and the real time
information employer year end declaration (formerly P35).
(Recommendation 3, paragraph 98)
9. If Her Majesty’s Revenue and Customs decide that they need the
information from those questions, we recommend that their completion
should be made compulsory, backed up by the potential for penalties to be
charged for incorrect answers or non-completion. (Recommendation 4,
paragraph 99)
10. If Her Majesty’s Revenue and Customs retain the questions, we recommend
that they revise the guidance notes accompanying the personal tax return
SA100 and the real time information year end declaration by employers to
make the relationship to IR35 clearer. (Recommendation 5, paragraph 100)
11. If Her Majesty’s Revenue and Customs decide that they do not need the
information gained from the questions, we recommend that the questions be
removed from the tax returns and declarations. (Recommendation 6,
paragraph 101)
12. Her Majesty’s Revenue and Customs did not convince us that the resources
currently allocated were sufficient to ensure compliance with the IR35
legislation.
13. We recommend that Her Majesty’s Revenue and Customs articulate with
greater clarity the costs they incur from IR35 compliance efforts and
administration, and the relationship between those costs and the overall yield
gained from the legislation. (Recommendation 7, paragraph 113)
14. We conclude that many individuals simply take a risk that Her Majesty’s
Revenue and Customs will not look into their employment status, an attitude
that is fostered by the decreasing number of compliance investigations.
15. We recommend that the Contract Review Service be publicised to greater
effect, that Her Majesty’s Revenue and Customs investigate ways to
encourage individuals to use the service and that they look into ways to
bolster confidence in its independence and impartiality. (Recommendation 8,
paragraph 123)
16. We accept that the guidance will never be able to give absolute certainty to
taxpayers of their status in relation to IR35 but we agree that the current
guidance is far from satisfactory.
17. We recommend that Her Majesty’s Revenue and Customs undertake a full
consultation on how the Business Entity Tests could work better to provide
greater certainty for taxpayers. (Recommendation 9, paragraph 134)
18. We commend the motive behind establishing the IR35 Forum as an
opportunity for wider stakeholder engagement.
19. We recommend that Her Majesty’s Revenue and Customs go to greater
lengths to demonstrate that they are receptive to the feedback that is
provided through this group and that they review the breadth of
membership. (Recommendation 10, paragraph 140)
20. We are concerned that, in some sectors, individuals who are providing their
services through personal service companies or, more often, umbrella
companies and agencies, have a limited awareness of how they have been
engaged to provide their work and who it is that has engaged them. This may
mean that the individuals are not aware that they have foregone at least some
levels of employment protection and benefits to which they would be entitled
if they were in conventional employment. We recognise the complexity of the
subject matter, and of the case law underpinning some of the distinctions
made, but believe that it ought to be possible to present these issues in a
concise and understandable manner.
21. We recommend that the Government should develop and publish a short
guide setting out the basic differences between employment and self-
employment. The guidance should be published across multiple platforms,
including both digital and paper, and should be made available to individuals
working in all industries where intermediaries are prevalent.
22. We recommend that the Government includes within the remit of the Low
Pay Commission a consideration of the use of personal service companies
and umbrella companies by lower-paid workers, and the implications for pay,
employment rights and statutory entitlements. (Recommendation 12,
paragraph 172)
23. As it is clear from the evidence that abuse of the expenses dispensations
operated by umbrella companies is taking place, we recommend that Her
Majesty’s Revenue and Customs ensure that enforcement action is taken to
end these abuses and to ensure that expenses dispensations are managed
correctly. (Recommendation 13, paragraph 181)
24. We also recommend that Her Majesty’s Revenue and Customs should review
its processes for granting and renewing expenses dispensations, in order to
ensure that potentially high risk organisations are granted dispensations only
when appropriate. (Recommendation 14, paragraph 182)
25. We acknowledge that there will be circumstances in which public sector
organisations, just like private sector organisations, may need to acquire
services from those who operate through personal service companies. For this
reason, we believe that any blanket restriction on public sector use of
personal service companies would not be beneficial to the delivery of public
services.
26. The Treasury Review of off-payroll appointments provided only a limited
assessment of the extent of such engagements; large areas of public service
provision, such as local government and some health services, were not
included in its scope.
27. We recommend that the Government carry out an assessment of the extent
to which off-payroll engagements are used elsewhere in the public sector,
including by those earning less than £58,200 per annum.
28. As the guidance embodied in Procurement Policy Note 07/12 currently
appears to be applied inconsistently across departments, we recommend that
Her Majesty’s Treasury take a leading role in ensuring consistency of
application and that it should go to greater lengths to monitor the
implementation of the Procurement Policy Note 07/12 guidance across
Government departments. (Recommendation 16, paragraph 226)
APPENDIX 1: LIST OF MEMBERS AND DECLARATIONS OF

INTEREST
Members
Baroness Donaghy
Lord Empey
Lord Higgins
Lord Myners
Lord Stewartby
Lord Woolmer of Leeds (resigned 12 January 2014)
Declarations of interest
No relevant interests declared
Baroness Donaghy
Lord Empey
Lord Higgins
Chairman, General Dynamics UK Limited
Director, Haymarket Group Ltd (publishing)
Director, Eurotunnel SA
Vice Chairman, Starr International Co Inc
Director, China Construction Bank (Asia) Corporation Limited
Chairman, Tikehau Investments Ltd
Governor, City of London School
Chairman, Bevis Marks Synagogue Trust
Shareholdings in Barclays plc, Apple Computers, Colgate (personal care),
BP, British Gas, Shell Petroleum, Scottish & Southern Energy,
GlaxoSmithKline (pharmaceuticals), Tesco, Goldman Sachs (investment
banking), Total SA (petroleum, France), Televisa, Mexico (cable tv), Wal-
Mart Stores, Inc (consumer goods), Research in Motion (mobile phones),
Deutsche Bank and Suncorp (petroleum, Canada)
Non-executive Director, Carphone Warehouse
Mentor for Mentore Consulting LLP
Occasional media work as member of Newsnight political panel
Chairman, OFSTED
Member, Advisory Committee, Board of Virgin Group Holdings Ltd (holding

company)
Adviser, Board of ARK (Absolute Return for Kids; charity)
Member of Council, King’s College, University of London
Member of Development Board, Frontline
Chair, Future Leaders (head-teacher training; charity)
Member, Advisory Board of Centre for Human Rights, Institute of
Education, University of London
Board Member, Teaching Leaders (middle school leaders’ training)
Lord Myners
Director, Carpetright plc
Director, Severn Trent plc (water)
Director, Royal Bank of Scotland Group plc
Shareholdings in a wide range of listed companies as listed in the Register of
Members’ interests
Lord Stewartby
Lord Woolmer of Leeds
A full list of Members’ interests can be found in the Register of Lords Interests:
http://www.parliament.uk/mps-lords-and-offices/standards-and-interests/register-
of-lords-interests/
Anita Monteith, Specialist Adviser
An employee of the Institute of Chartered Accountants in England and Wales.
APPENDIX 2: LIST OF WITNESSES

Evidence is published online at http://www.parliament.uk/personal-service-
companies and available for inspection at the Parliamentary Archives (020 7219
5314).
Evidence received by the Committee is listed below in chronological order of oral
evidence session and in alphabetical order. Those witnesses marked with * gave
both oral evidence and written evidence. Those marked with ** gave oral evidence
and did not submit any written evidence. All other witnesses submitted written
evidence only.
Oral evidence in chronological order

* QQ 1–12 Her Majesty’s Revenue and Customs (HMRC)
* QQ 13–21 Office of Tax Simplification (OTS)
** QQ 22–32 Professor Judith Freedman
* Bauer & Cottrell
* Low Incomes Tax Reform Group (LITRG)
* QQ 33–41 Institute of Chartered Accountants in England and
Wales (ICAEW)
* Association of Chartered Certified Accountants
(ACCA)
** Chartered Institute of Taxation (CIOT)
* QQ 42–61 Professional Contractors Group (PCG)
* Federation of Small Businesses (FSB)
* Freelancer and Contractor Services Association
(FCSA)
** APSCo
** QQ 62–73 Local Government Association (LGA)
* Department of Health (DoH)
** NHS
* QQ 74–80 Oil and Gas UK
* Amey plc
** QQ 81–92 TaxAid
* National Association of Schoolmasters Union of
Women Teachers (NASUWT)
** Union of Construction, Allied Trades and Technicians
(UCATT)
* QQ 93–104 Institute of Directors (IoD)
* Confederation of British Industry (CBI)
** QQ 105–114 Crossrail
** GlaxoSmithKline (GSK)
** BT
* QQ 115–128 Her Majesty’s Revenue and Customs (HMRC)
Alphabetical list of all witnesses

Mark Agombar
Association of Accounting Technicians (AAT)
* Association of Chartered Certified Accountants (ACCA) (QQ 33–41)
* Amey plc (QQ 74–80)
** APSCo (QQ 42–61)
British Broadcasting Corporation (BBC)
* Bauer & Cottrell (QQ 22–32)
BCS, The Chartered Institute for IT
Graham Boyd
Box Ten Ltd
** BT (QQ 105–114)
Care UK
Chartered Institute of Payroll Professionals (CIPP)
Clifford Chance LLP
* Confederation of British Industry (CBI) (QQ 93–104)
** Chartered Institute of Taxation (CIOT) (QQ 33–41)
Sue Christensen
ContractorCalculator
Sam Corcoran
** Crossrail
* Department of Health (DoH) (QQ 62–73)
Peter Disney
* Federation of Small Businesses (FSB) (QQ 42–61)
Four Seasons Health Care (FSHC)
** Professor Judith Freedman (QQ 22–32)
* Freelancer and Contractor Services Association (FCSA) (QQ 42–61)
Fujitsu
G4S plc
Julian Gall
Giant Group plc
** GlaxoSmithKline (GSK) (QQ 105–114)
* Her Majesty’s Revenue and Customs (HMRC) (QQ 1–12) and
(QQ 115–128)
HSBC
Julius J H Hutson
* Institute of Chartered Accountants in England and Wales (ICAEW)
(QQ 33–41)
Institute of Chartered Accountants of Scotland (ICAS)
* Institute of Directors (IoD) (QQ 93–104)
Institute of Interim Management (IIM)
Interim Management Association (IMA)
David Kirk
** Local Government Association (LGA) (QQ 62–73)
* Low Incomes Tax Reform Group (LITRG) (QQ 22–32)
* National Association of Schoolmasters Union of Women Teachers
(NASUWT) (QQ 81–92)
Network Rail
** NHS (QQ 62–73)
* Office of Tax Simplification (OTS) (QQ 13–21)
* Oil and Gas UK (QQ 74–80)
* Professional Contractors Group (PCG) (QQ 42–61)
Paul Phillips
Professional Passport
Recruitment and Employment Confederation (REC)
** TaxAid (QQ 81–92)
** Union of Construction, Allied Trades and Technicians (UCATT)
(QQ 81–92)
Angela Williams
APPENDIX 3: CALL FOR EVIDENCE

A Select Committee of the House of Lords, chaired by Baroness Noakes, is
conducting an inquiry into the use of Personal Service Companies in the public
and private sectors. The Committee seeks evidence from anyone with an interest.
Written evidence is sought by Tuesday 31 December 2013. Public hearings of
oral evidence will be held from November 2013 to January 2014. The Committee
aims to report to the House, with recommendations and conclusions, in March
2014. The report will receive a response from the Government, and may be
debated in the House.
The Committee is undertaking a review of the use of Personal Service Companies.
It intends to consider the implications for tax, National Insurance and wider issues
both from the point of view of workers and their clients.
The Committee seeks evidence on any aspect of this topic, particularly on the
following questions:
(1) To what extent are Personal Service Companies being used for the
provision of personal services to UK businesses?
(2) What is your view of the effectiveness and efficiency of the intermediaries
legislation, first introduced in 2000, in facilitating tax collection?
(3) Should the current intermediaries legislation be reformed and if so, what
would be the alternatives?
(4) To what extent does the current IR35 legislation impose additional
compliance burdens and administrative costs?
(5) Are the current avenues of consultation on IR35 working and what more
should be done to ensure that the Government listens to interested
stakeholders?
(6) Are HMRC’s recent efforts in improving the administration of IR35
judgement cases working? Is more guidance and advice needed to aid
individuals in judging the status of business transactions for themselves
or should further resources be given to HMRC for compliance efforts?
(7) Do businesses insist on the use of Personal Service Companies? If so,
should responsibility be placed on them rather than the worker to decide
whether a business transaction falls within IR35?
(8) Are individuals forced into the use of a Personal Service Company as a
prerequisite for being considered for work? If so, what can be done to
ensure that the use of a Personal Service Company is appropriate for the
individual?
(9) To what extent are Personal Service Companies still used in the Public
Sector? Should those engaged in public bodies and similar organisations
be prevented from working through a Personal Service Company? If so,
would the Public Sector experience difficulties in obtaining the skills and
expertise that are needed?
(10) What role do Umbrella companies play? To what extent are agencies
encouraging individuals to enter into such structures?
(11) Aside from the issues of Tax and National Insurance, what are the wider
benefits and drawbacks for the individual of using a Personal Service
Company?
You need not address all these questions.
APPENDIX 4: GLOSSARY
AAT Association of Accounting Technicians
ACCA Association of Chartered Certified Accountants
BBC British Broadcasting Corporation
BCS Chartered Institute for IT (British Computing Society)
BETs Business Entity Tests. A series of twelve tests, published
by HMRC in May 2012, which seek to give contractors
an indicator of the risk that IR35 would apply to a
specific contract.
CIPP Chartered Institute of Payroll Professionals
CIOT Chartered Institute of Taxation
CIS Constriction Industry Scheme
Compliance yield The revenue collected by HMRC from enforcement
action which uncovers non-compliance with the IR35
provisions.
CBI Confederation of British Industry
DoH Department of Health
Exchequer The estimated amount of revenue which is ‘protected’ by
protection the IR35 provisions (see paragraph 71)
Exchequer yield The revenue collected by HMRC from taxpayers making
payments in accordance with the IR35 provisions.
FSB Federation of Small Businesses
Freelancer An individual who, instead of working as an employee,
offers their services as a limited-term contractor,
sometimes working through a personal service company.
FCSA Freelancer and Contractor Services Association
GSK GlaxoSmithKline plc
HMRC Her Majesty’s Revenue and Customs
HMT Her Majesty’s Treasury
ICAEW Institute of Chartered Accountants in England and Wales
ICAS The Institute of Chartered Accountants of Scotland
IoD Institute of Directors
IIM Institute of Interim Management
IMA Interim Management Association
Interim Manager Interim managers are used to fill short-term management
vacancies in both the public and private sectors.
IR35 Forum Established in 2011, the Forum includes taxpayer
representatives and professional advisers, providing
advice to HMRC on the administration of IR35.
IR35 ‘rules’ or The legislative provisions which seek to apply standard

IR35 legislation rates of income tax and National Insurance to personal
service company engagements where, without the
presence of the personal service company, the
relationship would be considered one of employment.
Named after the Inland Revenue press release number
35, which announced the initial introduction of these
measures.
LGA Local Government Association
LITRG Low Incomes Tax Reform Group
LLP Limited Liability Partnership
LPC Low Pay Commission
MSC Managed service company. Sometimes referred to as a
‘composite’, this company structure places contractors
into groups of shareholders in a corporation, offering
some of the benefits of operating through a limited
company whilst limiting the administrative burden that
would be experienced by a personal service company.
The use of managed service companies was limited by
legislation in 2007.
NASUWT National Association of Schoolmasters Union of Women
Teachers
NHS National Health Service
NICs National Insurance Contributions
ONS Office for National Statistics
OTS Office of Tax Simplification
PSC Personal service company
PPN 07/12 Procurement Policy Note 07/12. Guidance, issued by the
Cabinet Office, concerning off-payroll appointments in
Government departments, their executive agencies and
non-departmental public bodies.
PCG Professional Contractors Group
REC Recruitment and Employment Confederation
RTI Real time information
Serial contracting The practice of securing ongoing ‘employment’ by
moving sequentially from one limited term contract to
the next.
Umbrella company An umbrella company provides invoicing, payroll and
contract administration for flexible workers and
contractors. The individuals concerned are employees of
the umbrella company, and do not operate their own
personal service companies.
UCATT Union of Construction, Allied Trades and Technicians
APPENDIX 5: IR35
The Chancellor announced today that changes are to be introduced to counter
avoidance in the area of personal service provision. This move underlines the
Government’s commitment to achieving a tax system under which everyone pays
their fair share.
There has for some time been general concern about the hiring of individuals
through their own service companies so that they can exploit the fiscal advantages
offered by a corporate structure. It is possible for someone to leave work as an
employee on a Friday, only to return the following Monday to do exactly the same
job as an indirectly engaged ‘consultant’ paying substantially reduced tax and
national insurance.
The Government is going to bring forward legislation to tackle this sort of
avoidance. The Inland Revenue will be discussing the practical application of new
legislation with interested parties and will work with representative bodies on the
production of guidance. The new rules will take effect from April 2000.
Details
The Government is committed to encouraging modern businesses which develop
and build on the strengths and commitment of their workforce. The aim of the
proposed changes is to ensure that people working in what is, in effect, disguised
employment will, in practice, pay the same tax and National Insurance as someone
employed directly.
Businesses employing their workers directly say that they are unable to compete
with those encouraging the avoidance at which the new legislation is aimed. As a
result, ordinary workers can find they are unable to compete for jobs with those
willing to participate in such arrangements. But those who do participate often
have to pay a price in terms of loss of protection under employment law. They
may find their terms and conditions altered—perhaps losing entitlement to sick
pay or maternity leave. They may even lose their jobs without entitlement to notice
or redundancy pay. They will usually have no right to any claim for unfair
dismissal and may lose their entitlement to social security benefits through a
failure to make adequate contributions.
The proposed changes are aimed only at engagements with essential characteristics
of employment. They should affect only those cases where these characteristics are
disguised through use of an intermediary—such as a service company or
partnership. There is no intention to redefine the existing boundary between
employment and self-employment.
Legislation is to be introduced to address the problem with effect from April 2000.
However, a primary concern is to minimise any impact of these changes on
ordinary businesses not involved in avoidance. To this end, the Inland Revenue
will over the next few months be working with representative bodies on aspects of
the practical application of the new rules and on the production of guidance.
HMRC
9 March, 1999

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HOUSE OF LORDS

Select Committee on Personal Service

Report of Session 2013–14

Ordered to be printed 31 March 2014 and published 7 April 2014

Published by the Authority of the House of Lords

London: The Stationery Office Limited

Membership of the Committee

Evidence is published online at

References in footnotes to the Report are as follows:

If IR35 is to be maintained, the guidance which is currently made available to

We found that a significant number of lower paid individuals were engaged

We recommend measures to build awareness of such matters amongst the groups

Finally, we found that the Government’s guidance on off-payroll engagements in

Personal Service Companies: a growing phenomenon

The Committee’s work

 The use of Personal Service Companies, Relevant Legislation and Recent

CHAPTER 2: THE USE OF PERSONAL SERVICE COMPANIES,

The use of Personal Service Companies

The growth of personal service companies: ‘push’ and ‘pull’ factors

The IR35 legislation

34 SI 2010 No. 93, paragraph three.

unable to compete for jobs with those willing to participate in such

(a) The conditions specified in paragraphs 3, 4 and 545 are met in

Subsequent changes to the legislation

Recent debate and proposals for reform

The OTS Review of Small Business Taxation

Autumn Statement 2013 and Finance Bill 2014

CHAPTER 3: THE CONTINUING VIABILITY OF THE IR35

Introduction and Background

employees who would move to incorporate in the absence of IR35, we were

The effectiveness of the legislation

The Call for Reform

Evidence asked the following question: “Should the current intermediaries

Insurance incentives that are on offer to those who operate through a

employers to make the relationship to IR35 clearer.

CHAPTER 4: HMRC’S ADMINISTRATION AND THE EFFECT OF

Introduction and Background

Enforcing the legislation

consensus surrounding the degree to which they believed efforts should be

think there is necessarily a direct correlation between the resources you

Taking the Risk

guidance and channels of communication with interested stakeholders. We

118 John Whiting

sand, some people—not everybody—will game that line. There is a

CHAPTER 5: IMPLICATIONS FOR THE LOWER-PAID

Introduction and Background

135 Angela Williams, written evidence and Frances Corrie (Q82).

Issues for the lower paid

service companies and umbrella companies, they generally have lower

salaries.153 The documentation associated with engagements through

The issue of awareness

153 ICAEW, LITRG and NASUWT

A role for the Low Pay Commission?

Expenses and enforcement

171 G4S plc

176 Professional Passport

CHAPTER 6: THE PUBLIC SECTOR

Introduction and Background

The principle of public sector use of personal service companies