Personal Service Companies - Select Committee on Personal Service Companies Contents

Personal Service Companies


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:

·  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.

1   Committee of Public Accounts, Off-payroll arrangements in the public sector (12th Report, Session 2012-13, HC 532). Back

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