New IR35 guidance

HMRC has announced plans to publish updated guidance on IR35 for taxpayers along with more detailed information on the costs of complying with the legislation later in the year as part of a package of measures in response to the House of Lords select committee’s report on Personal Service Companies (PSC) say Harris & Co accountants Northampton the specialist small business accountants #accountantsinnorthampton

In its response to the committee’s recommendations, the government states that:

‘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.’

The response says new guidance will be published shortly following a comprehensive review during which HMRC worked closely with stakeholders to understand user needs.

In addition, during the autumn HMRC will publish an updated administrative impact assessment note setting out the current administrative costs which taxpayers incur in dealing with IR35.

HMRC is also to review the use and impact of business entity tests and will report and make recommendations to the IR35 Forum during 2014.

The House of Lords PSC committee report, which was released in April, was critical of HMRC in relation to the absence of reliable information that the tax department had collected concerning the use of PSCs. The report recommended that HMRC should ‘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).’ It wanted this information to be compulsory.

The government response says HMRC will undertake a full review of these questions focusing on their form, purpose and clarity, with a view to making any necessary changes ‘at the earliest practicable date’.

HMRC will also look at the misuse of dispensations as part of a move to tackle non-compliance by umbrella companies.

The PSC committee report also said HMRC needed to do more to demonstrate that the revenue protection it claim for the IR35 legislation outweighs the costs it imposes.

Baroness Noakes, the chairman of the committee, said:

‘HMRC failed to demonstrate that they had a sound basis for the £550m of tax and national insurance that they cited as being at risk if IR35 were to be abolished or suspended. The deterrent nature of the IR35 legislation is its main rationale. We recommend that HMRC publish a detailed assessment of this figure.’

The government’s response includes a note, Estimating the cost of abolishing IR35, which provides more analysis of HMRC’s £550m estimate, based on figures for 2010-11, which it describes as ‘robust’.

This puts the direct cost to the Exchequer at £30m, which is the difference between tax paid on salary taken from the company (where IR35 applies) and tax that would be payable if the individual adopted the most tax efficient remuneration strategy in the absence of IR35. On top of this there is a ‘behavioural’ Exchequer impact totalling £520m, made up of £115m ascribed to changes in directors’ behaviours and £405m to employees.

The full Government response document is available from GOV.UK.