HMRC reveals PSC dividends to be more than just monitored
The dividend levels of personal service company contractors are more than just monitored – they are, in fact, the subject of a statistical analysis that feeds into the amount of revenue IR35 protects, the taxman has revealed.
Appearing at the Personal Service Companies Committee’s last oral evidence session, tax officials disclosed their calculation that about 220,000 PSCs draw “at least” 50 per cent of their income as dividends.
Based on its “operational experience”, HM Revenue & Customs said it expected that around half of those 220,000 PSCs would pursue an even more “aggressive approach” to dividends if IR35 did not exist.
In fact, HMRC’s Robin Wythes thinks that without the rule, “most directors would simply pay themselves up to the primary threshold to protect their NI position and [then] take…virtually all of their [remaining] income” out as dividends.
This assertion from HMRC’s employment status team leader was backed by Peter Lumb of HMRC’s Direct Business Tax team, who, like the Revenue’s deputy director Rowena Fletcher, flanked Mr Wythes at the evidence session, held on Monday.
Throughout it, and more visibly than at any of the committee’s nine other oral evidence sessions, the Lords seemed unimpressed with the tax authority’s grasp of figures, relating to both IR35 and PSCs.
In response to data from Mr Lumb, Baroness Noakes stabbed, “Is this any more than guess work?” -- to an unrelated reply later from Ms Fletcher, Baroness Morgan shot back “That’s all surmise really” and to all the tax staff, Baroness Donaghy quizzed “Is HMRC over-reliant on estimates?”.
But it was HMRC’s estimate of how much revenue IR35 protects that drove the session, not least because the department last month said it was £550m, up from the £475m that Ms Fletcher submitted to the committee in November.
Asking about the “not inconsiderable” difference between the two figures, Baroness Noakes was told by Mr Lumb that the lower figure was based on data for the 2008-09 tax year, whereas the higher figure was from 2010-11.
Further pressing for an explanation as to how IR35’s protective effect over the period rose by this “big” amount (£75m), the committee heard from HMRC that it has “refined” and “updated” some of its assumptions.
“The bigger part of the change [owes to] how we’ve looked at the lower limit of income above which people would switch to a PSC,” said Mr Lumb, estimating that 55,000 employees would be PSCs if it was not for IR35.
“Previously the evidence suggested that…only people with income of over £80,000 would switch to being a PSC but [our latest] operational evidence suggests that the threshold should be rather lower and broader.
“So changing the threshold at the amount of income above which we estimate people would switch to being a PSC [if it weren’t for IR35] is the main element of the increase.”
Yet Mr Lumb conceded that even this figure – the stock of would-be PSCs that, if IR35 didn’t exist, would deprive the Exchequer of £405m – is only an “assessment” informed by “quite a lot of uncertainty.”
A similar reluctance to be bound by figures came from Ms Fletcher who, despite initially claiming that she cannot “breakdown” how much IR35 costs HMRC to police, eventually offered the sum of £700,000 a year.
This is the “ballpark figure” of the cost of running HMRC’s four IR35 specialist compliance teams, comprised of 40 officials (not all of them full-time), and is derived from pay averages taken across HMRC’s workforce.
“[These] 40 people spend not all but a substantial amount of their time on IR35 cases,” said Ms Fletcher.
“They do work on other broader employment income avoidance risks. And they are part of a much broader employer compliance field force who look across employers more generally, including other intermediaries such as umbrella companies and MSCs.”
Asked by the Lords whether HMRC were admitting to spending £700,000 on IR35 to get back just £1.1m, she defended: “You can’t equate the value of the team directly to the compliance yield”.
Another snippet of new information released to the committee by the Revenue relates to the question of whether the taxpayer is a PSC, which is asked on both the P35 end-of-year return and the individual tax return.
For 2011-12, the latest year for which figures are available, only 1,000 individuals completed the PSC question on their self-assessment form, while 120,000 employers answered ‘yes’ to being a PSC on the P35.
Acknowledging the “disjoint”, Mr Wythes put the “extremely low” volume of responses on the tax return down to taxpayer ignorance, wilful deceit, external commentators advising not to respond, and directors worrying about “unduly raising their profile with HMRC.”
His comments about what HMRC’s focus for the future should be in relation to PSCs and IR35 was less multi-faceted as, in short, he wants a ‘back to basics’ approach.
“In terms of IR35…to look fundamentally at what is the underlying relationship,” explained Mr Wythes.
“What we need to do is to try and, frankly, debunk all the mystification that has grown up over IR35 since 2000 and go back to the basics and simply say: ‘What is the true nature of the underlying relationship?’
“And if that is truly at arm’s length and the worker is truly in business on their own account, then IR35 will not apply, whatever the nature of the intermediary that’s interposed between the worker and the end-client.”
Ms Fletcher sounded supportive of a more educational approach. Pointing to workers who have a “borderline” IR35 status, she stated:
“For the legislation to work effectively, I think it’s essential that we provide guidance and support to give people more certainty, and that’s the heart of our work with the IR35 Forum.”
She added that IR35 has been “quite effective” in tackling the Friday to Monday scenario, at odds, it seems, with Baroness Noakes who said the committee has seen “almost no evidence” that the scenario is part of the current problems with the legislation.
Nonetheless, HMRC’s deputy director with special responsibility for employment status indicating that she’d like to offer more guidance on IR35 will be welcome by contractors, albeit probably not the five who HMRC says are currently under investigation and heading for tribunal.
Having been provided a run-down of the latest tribunal figures – 25 IR35 cases have been heard since the rule took effect (12 in the taxpayer’s favour – 13 in HMRC’s), Baroness Noakes said it was time for her committee to retire and “put our heads together to work out what to say” to ministers.
In line with employment manual ESM 2076, HMRC said the “vast majority” of PSCs would not be hit by the proposed rules, and insisted to the Baroness that what tax inspectors will target from April this year was “quite different”.
Editor's Note: Further Reporting -