On 17 July 2015 HMRC issued a consultation document on the intermediaries legislation (IR35). The intermediaries legislation was first introduced in 2000 to combat tax avoidance through intermediaries such as personal service companies. The legislation requires individuals working through an intermediary to pay roughly the same amount of tax and national insurance as persons working as employees and providing their services directly.

The consultation now aims to make the legislation more effective and go further in providing a level playing field between direct employees and people doing the same work but through their own limited companies. Incentives to use personal service companies have increased with increases in national insurance rates and reductions in the rate of corporation tax.

The consultation document suggests that there is considerable non-compliance with the rules, as the number of personal service companies has greatly increased since the legislation was introduced but the number of people paying tax under IR35 has remained roughly the same. Although some of the personal service companies would not fall under IR35 because the worker would otherwise be regarded as self-employed, in 2011/12 around 10,000 people paid tax under the provisions. This was an estimated 10% of those who should have been paying tax on part or all of the income of their personal service company.

HMRC has recently strengthened its specialist compliance teams and greatly increased its IR35 enquiries, taking a risk-based approach to target its activity in the most cost-effective way. The task is difficult because currently the personal service company has the responsibility to operate IR35 on a contract by contract basis, so enquiries have to cover each engagement of each personal service company. Several parties may be involved in a contractual chain and the responsibility of each party for cooperation with HMRC may not be clear.

The government currently estimates that non-compliance with this legislation is costing around GBP 430 million in tax each year. In addition to low levels of compliance there are concerns from taxpayers about the uncertainty and complexity of determining whether a contract falls within the scope of IR35. The UK government is therefore asking for evidence from stakeholders as to how personal service companies are currently operating IR35 and issues arising for individuals and businesses. The government is also asking for proposals on how to improve the effectiveness of IR35 bearing in mind the need for the legislation to be straightforward and not create undue burdens on individuals or businesses.

One option is to improve the administration of IR35, which has been examined in a review of improvement to the administrative approach published in January 2015. Improvement in the enforcement of compliance by HMRC has also begun but there are problems with interventions due to the need to look at each individual engagement and the lack of clarity on who is responsible for engaging with HMRC. The government is therefore looking for views on alternative options for more fundamental reforms to IR35 to meet its stated objectives.

Another option is for those engaging workers through a personal service company to play a greater role in ensuring that the right amount of employment taxes are paid. The person engaging a worker would need to look at whether IR35 applies and deduct the correct amount of income tax and national insurance as for direct employees. Views are invited on this option and on how it could be made sufficiently straightforward for those engaging workers to build a review of IR35 issues into their routine tasks when hiring.

Views are invited on the effectiveness of this option and whether it would raise particular challenges for some sectors where for example there are large employers who are geographically dispersed. Views are sought on whether IR35 should operate differently where an individual rather than a business engages the personal service company, how the burden for employers could be decreased and if the changes would have any other impact.

The test for determining if IR35 applies could be simplified by aligning the test with the factors already used for temporary workers under the agency rules, looking at supervision, direction or control. Another possibility for simplification is to require an engagement to continue for a minimum period before being considered one of employment. The government is looking for comments on the implications of a change in the test and the preferred approach. Comments on any alternative options are also requested.