Personal Service Companies - Select Committee on Personal Service Companies Contents


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.

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