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:
· 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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