Government: "difficult to estimate" cost of abolishing IR35 contractor taxation regime

The government also used its response to a recent report by a House of Lords select committee to confirm that it had no plans to make end users of services provided by personal service companies responsible for compliance with the legislation, known as IR35. This change to the regime had been suggested by the Institute of Chartered Accountants of England and Wales (ICAEW), amongst others.

"The government's response to the committee's recommendations is predictably underwhelming, and it seems unlikely that we are going to see any material changes to the IR35 regime which would satisfy its detractors - rather, just some tinkering around the edges," said employment tax expert Chris Thomas of Pinsent Masons, the law firm behind Out-Law.com.

"It is, however, helpful to have express confirmation that the government has no plans to shift the compliance burden onto end users, and that will certainly be welcome news for many businesses," he said.

A recent report by a House of Lords select committee established to look at the growing use of personal service companies called on HM Revenue and Customs (HMRC) to publish a "detailed assessment" of the £550 million in tax and national insurance contributions (NICs) it has said would be at risk if the legislation, known as IR35, was to be abolished. In response, the government has said that it will publish an "updated impact assessment note" setting out the current administrative costs of the regime to taxpayers.

"The government is confident that the figure quoted for Exchequer protection from IR35, and the methodology used in the calculation of that figure, is robust," it said in a report, published this week in response to the select committee's recommendations. "As acknowledged by the Committee in its report, the figure has been subject to extensive internal quality assurance."

"The yield from anti-avoidance measures is generally more uncertain than that from other policy measures. The main areas of uncertainty in this costing relate to the salary levels at which individuals would incorporate and the number of directors who would change their remuneration strategy in the absence of IR35. Emerging evidence, including that provided to the Committee by HMRC in arriving at the IR35 costing, indicates that those on lower salaries are incorporating and that the salary bracket used in the calculation for employees could therefore be further expanded," it said.

As part of its response, the government said that it could do more to "clarify and amplify" the figures supplied to the committee by HMRC as a result of its initial inquiry. For this reason, it has provided a more detailed breakdown of its calculations as part of the response. It will publish an updated administrative impact assessment note in autumn 2014, according to its response.

The government has also confirmed that it will "re-examine the operational integration" of the income tax and National Insurance regimes, as recommended by the committee. However, it will "wait for further progress on planned operational changes to the tax system" before taking this forward, as "employers are already adjusting to a significant number of reforms to payroll systems".

First introduced in 2000, IR35 is intended to stop contractors in 'disguised employment' from using limited companies to avoid paying tax and NICs. It ensures that contractors have to pay tax and NICs as employees, even when they are working via a personal service company (PSC). A PSC is typically a limited company of which the worker is the owner and sole director; through which that worker is contracted to supply professional services such as IT, or in the oil and gas sector.

According to HMRC estimates provided to the House of Lords select committee, which published the results of its inquiry in April, there are currently around 200,000 PSCs operating in the UK and the number has more than doubled in the past decade. The committee said in its report that there was a "general lack of information" about how widespread the use of such companies was, "due, in no small part, to the absence of reliable information collected by HMRC".

The government said in its response that many of the committee's 16 recommendations were already being taken forward as part of previous reviews. As such, it does not intend a new review of HMRC's IR35 guidance or of the 'business entity tests', introduced in May 2012 as a way for contractors to assess their risk of being caught by the legislation.

However, it intends to carry out a full review of the 'service company' questions currently included on the self-assessment return and year end declaration forms, and make any necessary changes at the "earliest practicable date". The select committee recommended that this review should address whether "complete and accurate responses" to these questions was necessary and, if so, consider whether to make responses compulsory. If not, the committee has recommended that these questions be removed from the forms.