Tax isn't a limited company's raison d'etre, Lords told

A large number of personal service companies would still remain and come into existence even if there was no such thing as taxation, the Lords inquiry into such contractor businesses has been told by a leading tax expert.

Stephen Herring, head of tax at the Institute of Directors, on Monday reminded the Lords that PSCs would continue to thrive in a world without tax because, partly, of “the flexibility” they offer to both hirers and workers alike.

Engagers don’t wish to be left with the costs of having employees and no business income to show for it, so opt for PSCs, often if their outfit faces “competitive pressures” or  cannot predict demand from its customers.

But the other reason, he added, why PSCs would remain even if taxation does not is that, in principle, “if payments are made from one company to another company, and then out to a director or employee of that [second] company, then there is no tax saving.”

His portrayal of PSCs is in contrast to committee chair Baroness Noakes’ who, when prompting the witnesses at the prior evidence session (featuring unions) to begin speaking, chose to cite two motivators of PSC usage which are both negative -- to avoid an employment relationship and to avoid NICs.

Ironically, it is this “blanket assumption that the use of a PSC alone implies a tax avoidance motive [to be] present” which the IoD finds to be problematical, particularly when it is made by HM Revenue & Customs.

“We think HMRC needs an appropriately nuanced response not to look at a PSC as automatic evidence of some form of tax avoidance,” said Mr Herring, a former partner at accountancy firm BDO. “Indeed, quite often when the costs of managing the entity are factored in, there is no cost saving.”

Flanking the IoD tax boss at Monday’s evidence session was Neil Carberry, director of skills and employment at the Confederation of British Industry (CBI), who agreed that the presumption of tax avoidance upon sight of a PSC was misguided.

He told the Lords: “Decisions on being a PSC, in particular at that high scale end, are very often not just about tax for the individual involved; they’re about the flexibility of the work.”

It follows that HMRC ramping up its IR35 investigations – or being handed adequate resources in pursuit of an optimum IR35 cost-yield ratio --  would not necessarily bear fruit for the Exchequer, as was postulated by Mr Herring.

“[It would be] incredibly difficult to try to calculate because…[the] great majority of PSCs are being properly advised and properly account for their tax and NIC liabilities,” he said. “So with most investigations, HMRC would draw a blank.”

But the CBI disagreed, preferring that better enforcement of IR35 --  a rule which “largely works” -- should be the taxman’s priority, following the “fall” in IR35 investigations between 2007 and 2011.

Though in an attempt to put PSC usage and tax compliance into context, the employers’ group said the committee’s priority should be the other activities in the temporary labour market, especially those at the lower end.

“There are clearly issues in the use of agencies and allegedly but actually not independent umbrella companies operating payroll,” Mr Carberry said. “I think there is a lot more justification for you, as a committee, to be looking into the practice at that end of the market.”

Among its other recommendations to the Lords, the CBI said the assurance process for IR35 compliance should not be extended from the public sector to the private sector, as doing so would have a “chilling effect.”

The IoD’s Mr Herring is less sure, as he believes that PSCs in the private sector could be made to issue their clients with a written assurance that their tax obligations will be met, allowing engagers “a defence” in the event of a liability arising.

But except for receiving such a statement, and checking that the PSC is solvent, prospective clients should not seek further assurances or they risk becoming “mini-HMRC[s],” which PSCs would find “intrusive,” he said.

The institute does, however, want some of the Revenue’s risk-assessment processes to be modernised, notably its “archaic”  interest in whether the worker uses their own equipment, and its “predominant view” that a PSC with a single client signals an inside-IR35 position.

Unsurprisingly, both the employers’ groups were unified in asserting that the engagers of workers found to be inside IR35 should not be held responsible for tax purposes, even though that was the 1999 legislation’s original intention.

Editor's Note: Further reporting on the PSC committee -

Former accountant to lead PSCs probe

Lords want your input on personal service companies

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

'Many PSCs have no idea about unpoliceable IR35'

Taxman's IR35 officials 'monitoring dividend levels'

Axing IR35 'would save contractors £843 a year'

Public sector backs leaving PSCs as they are

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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