Personal Service Companies (Select Committee Report)

Lord Palmer of Childs Hill Excerpts

Tuesday 17th June 2014 Lords Chamber

[Lord Palmer of Childs Hill (LD)]

My Lords, I, too, was a member of the committee and I thank my noble friend Lady Noakes for her incredibly able chairmanship of it. We received a very complex set of reports, which were often conflicting and incomplete. I shall not repeat her comments on the Government’s response, which did not really address many of the problems that were raised.

My noble friend Lady Noakes dealt in great detail with the report and the response from the Treasury. Perhaps I may take a more generalised look at this issue. I came to the Select Committee with the experience of 28 years as a local government councillor. With some relief, I stepped down this May. I also have a lifetime behind me as a practising chartered accountant, so IR35s and the whole concept of tax reduction were not new to me. My view before the hearings was that personal service companies were essentially a means of reducing income tax and national insurance. That was my view when I went into the committee. People who were self-employed were able to claim greater expenses against their income and thus reduce their tax. There was a difference in tax law for those who were employed. Any expenses claimed had to be wholly, exclusively and necessarily in the course of one’s employment. If you were self-employed, any expenses claimed had to be only wholly and exclusively; the “necessarily” did not come in and you could claim more expenses, thus reducing your tax.

Being a personal service company is cost effective for what I will for simplicity call the employer—although it is not the employer—paying via such a company. The so-called employer does not have to pay holiday pay, redundancy pay, sick pay or employer’s national insurance, as well as a number of other things. So you might say that it is pretty useful. The employee is able to reduce his tax and national insurance liabilities by using a personal service company. It is good for the employee and employer, if I may call them that, but not so good for tax-gathering, because it essentially reduces the taxes that the state receives.

I was particularly worried by the move to use personal service companies in local government, the BBC, health authorities and the like. There is an acceptable use, as mentioned by my noble friend Lady Noakes, such as in employing IT contractors for a specific task—a contractor who may well have many other clients, be on a short-term contract, and so on. But a test of being self-employed in the old days, when I practised as a chartered accountant, was that you had recurring fees, not necessarily from one but from at least two clients. You could very well be treated as being an employee by the Inland Revenue if you had only one payer of your fees. But is it really acceptable to have people in designated positions of chief executive, director, assistant director or head of a department who are not employees under PAYE? To my mind, this is the big fault of what we have ended up with through personal service companies. However, in the private sector, it has always been sound business practice to trade through a company to take advantage of limited liability. This could apply whether you were the local grocer, running an IT company or whatever. After six months of hearing very complex and often conflicting evidence, I saw the problem as being that a whole industry has been built up on how to trade as a personal service company and avoid the pitfalls of IR35.

It appears that very few personal service companies are investigated by HMRC for non-completion of the IR35. It was shattering to hear what a small number it is. If there is any benefit it is purely that of deterrence. This was addressed by my noble friend Lady Noakes’s comment about the larger sum which the Inland Revenue theoretically maintains has been saved. I reckon that personal service companies simply chance their arm that they will not be caught by the IR35 legislation and do not actually bother too much with it. I will not repeat the comments made by the noble Lord, Lord Myners, and my noble friend Lady Noakes about the Treasury Minister or civil servants not coming to give evidence. I agree entirely with what they said.

After six months on the committee, having gone into the committee with a completely different preconceived view, I came to the conclusion that the report and government response should be noted, which is what we are asked to do, but I am not happy with it. To my mind, having thought about it even after the end of the committee proceedings, I believe that one of the fault-lines is that public bodies should not pay senior employees through personal service companies, or, indeed, umbrella companies. By some form of government directive, enforced by the payment of grant allocation, these bodies should be forced to employ people as proper employees under PAYE. If these are government-style bodies, however one looks at them, then the Government have control in terms of the money that those government bodies receive, and one of the requirements should be that they do not try to circumvent the PAYE system, which most people in this country are caught by.

Other than that—this is my final, rather bold statement—we should abolish IR35s and let all the accountants, lawyers, contractors, organisations and politicians go and get a life, without IR35s. There will be, in my view, no real, noticeable loss to the Exchequer and if there is no noticeable loss to the Exchequer, can other noble Lords and the Minister please tell me why we have entered in this farrago of IR35s? It is a deterrent to do something which is not really deterring. If there were no IR35s, the Exchequer would not lose more than the very modest sums that my noble friend Lady Noakes mentioned. The idea of IR35s is almost a jealousy that some part of our community—our business community—is getting a better deal than anybody else. That may well be the case, but it is not a case to my mind, having come at this from completely the other angle as a practising chartered accountant. There is no benefit in the IR35 and when HMRC and Treasury Ministers deign to come back to your Lordships’ House on this matter, I hope that they will take that point into account.

--- Later in debate ---

[Lord Newby]

Well, it is a transfer of money from one part of the Government to another, but this is hardly surprising since it is one part of the Government that has transgressed a rule set by another part of the Government. As for firing senior civil servants for not having kept this properly under review, I am rather tempted by the suggestion—but if it were a principle, we would rapidly find that there was a depletion of civil servants, not specifically in this area but from a whole raft of other areas where there may have been the odd transgression that was not stamped down on quickly enough.

The noble Lord, Lord Davidson, asked an extremely interesting question about the Scottish situation and the relationship between the UK and Scotland, and asked whether there had been discussions with the Scottish Administration on this issue. I am not absolutely sure but I am almost sure; I suspect that there have not been.

This debate has confirmed that personal service companies play a vital role in the UK economy. However, there are those who seek to exploit such arrangements to gain a tax advantage. Because of this, in our view there is still a clear need for IR35. However, there is still more to be done in improving its administration, and HMRC, in partnership with the IR35 Forum, is working very hard on this. We welcome the committee’s recommendations, which will help with this very important work.

[Lord Palmer of Childs Hill]

Before the Minister sits down, I wish to take up the point about the £500 million saving, which the Minister said I had little regard for. My regard is that it is mythical—there is no proof of it. If HMRC has proof of this, will it bring it forward? The problem with a deterrent is that it is hard to tell what you have deterred and how much you have gained. If there are people who should have been in IR35 and were then brought into it, specific details would be available of the money that had been recovered. I say to my noble friend the Minister that I have no confidence in the figure of £500 million; if I had, I would not have raised the matter.

[Lord Newby]

My Lords, I think the point is: what would happen if the restraint were lifted? Would individuals pay more or less tax? HMRC has looked at the behaviour of individuals in a whole raft of other areas where it has a lot of experience, and has drawn what it believes to be reasonable conclusions—which I have looked at and which seem reasonable to me. By definition, though, you cannot absolutely pinpoint how much evasion of tax you have deterred; that is impossible to do with any degree of certainty.