Contractors are on the back foot in the PSC 'inquiry'

As the third batch of professional bodies and contracting experts prepare for questions from the House of Lords committee probing the tax issues of personal service companies, this review warrants a closer look, writes Paul Spindler, partner at Kingston Smith LLP.

The latest expert witnesses, who will face the Personal Service Companies Committee on Monday, will give evidence in what, disturbingly, has been called an “inquiry”. This makes it sound like a HM Revenue & Customs investigation, and that’s before any “other wider issues” that the committee may be looking for are raised.

It was Baroness Noakes, who is leading the review, that gave the committee this unfortunate steer. Reflecting on her chairing of the committee, she said: “This inquiry will form a wide-ranging review of the use of personal service companies.

“During the course of this new inquiry, we will consider the extent to which personal companies are used and the implications for tax, national insurance and other wider issues, both from the point of view of workers and those who engage them.”

Her follow-up comment is even more troublesome, especially to personal service company owners who, over the past 15 years, have had to adapt to numerous reviews and changes in the law to remain compliant.

She stated: “In these economically difficult times, it is important that the government receives the tax it should rightfully be receiving, from all those who should be paying it.”

I take issue with two of the terms used here. Surely the “economically difficult times” are the responsibility of the government. Maintaining economic stability must be a priority of theirs but, let’s face it, borrowing in a boom and spending money that you don’t have doesn’t strike of a well-managed economy.

Many in the PSC community will be wary of the phrase ‘receiving the tax that the government is rightfully due’, which is often used by HMRC.

This could be taken to mean the amount that is payable under the wording of the law, or it may suggest a figure that is considered to be the maximum tax due. If you were in as much debt as the government is, you’d be looking to get as much from your taxpayers (or ‘customers’ in HMRC’s view) as possible.

The positive aspect of this review is the Baroness herself. As some may remember, she became the first female President of the Institute of Chartered Accountants in England and Wales in 1999. At the same time, she was a non-executive director of the Bank of England and a governor of the London Business School, while still overseeing privatisations and other public sector work at KPMG. Trade journal Accountancy Age described her as "the country's most high profile accountant”.

Her experience is auspicious; at least the review is being led by someone who will quickly understand the vast majority of issues and whom, you would hope, will have free market values at heart. I say ‘vast majority,’ because at the last session the Baroness admitted that she hadn’t heard of payday by payday schemes which, fortunately, aren’t the focus.

However, any optimism about this review into personal service companies should be tempered against the findings of Graham Aaronson QC, who was recently asked to look at UK tax law as part of a review, to see if we needed a General Anti-Avoidance Rule. He described the UK’s tax legislation as “notoriously long and complex”, adding that “in many places it is virtually impenetrable”.

But it doesn’t sound that complicated to me. Tax law has become an enormous burden on the taxpayer; it would be much fairer to go back to basics and get it right, rather than laying layer upon layer of complexity.

The GAAR (which has become the General Anti-Abuse Rule) is the latest in a long line of measures designed to stop taxpayers from reading the law as it is written, or altering the meaning where the law has not been beneficial to the Treasury/HMRC.

Following this latest review, the recommendations from which must be made no later than March 2014, I suspect we will hear of further tightening up of the rules for personal service companies and, perhaps, an increase in the number of IR35 enquires by HMRC.

One thing is for sure: we live in a mobile society and it may be that the UK’s talented ‘customers’ choose to find other countries in which they might live, work and pay for the services they receive in return.

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