Personal Service Companies

377 Pages·2014·2.15 MB·English

SELECT COMMITTEE ON PERSONAL SERVICE COMPANIES
Oral and written evidence

Contents
Mark Agombar—Written evidence ................................................................................................... 4
Association of Accounting Technicians (AAT) and Chartered Institute of Payroll
Professionals (CIPP)—Written evidence .......................................................................................... 9
Association of Chartered Certified Accountants (ACCA)—Oral evidence (QQ33-41) ... 23
Association of Chartered Certified Accountants (ACCA)—Written evidence ................... 24
Amey Plc—Oral evidence (QQ74-80) ........................................................................................... 30
Amey Plc—Written evidence ........................................................................................................... 31
APSCo—Oral evidence (QQ42-61) ............................................................................................... 35
British Broadcasting Corporation (BBC)—Written evidence .................................................. 36
Bauer & Cottrell—Oral evidence (QQ22-32) .............................................................................. 39
Bauer & Cottrell—Supplementary written evidence .................................................................. 40
BCS, The Chartered Institute for IT—Written evidence .......................................................... 44
Graham Boyd—Written evidence ................................................................................................... 45
Box Ten Ltd—Written evidence ..................................................................................................... 49
BT—Oral evidence (QQ105-114) ................................................................................................... 55
Care UK—Written evidence ............................................................................................................ 56
Clifford Chance LLP—Written evidence ....................................................................................... 59
Confederation of British Industry (CBI)—Oral evidence (QQ93-104) .................................. 60
Confederation of British Industry (CBI)—Written evidence .................................................... 61
Chartered Institute of Taxation (CIOT)—Oral evidence (QQ33-41) ................................... 65
Sue Christensen—Written evidence .............................................................................................. 66
ContractorCalculator—Written evidence .................................................................................... 67
Sam Corcoran—Written evidence ................................................................................................. 78
Crossrail—Oral evidence (QQ105-114) ....................................................................................... 81
Department of Health—Oral evidence (QQ62-73).................................................................... 90
Department of Health—Written evidence ................................................................................... 91
Department of Health—Supplementary written evidence ........................................................ 95
Peter Disney—Written evidence .................................................................................................... 96
Federation of Small Businesses (FSB)—Oral evidence (QQ42-61) ......................................... 97
Federation of Small Businesses (FSB)—Written evidence ......................................................... 98
Federation of Small Businesses (FSB)—Supplementary written evidence ............................ 100
Four Seasons Health Care (FSHC)—Written evidence ........................................................... 101
Professor Judith Freedman—Oral evidence (QQ22-32) ......................................................... 102
Freelancer and Contractor Services Association (FCSA)—Oral evidence (QQ42-61).... 114
Freelancer and Contractor Services Association (FCSA)—Written evidence ................... 115
Fujitsu—Written evidence .............................................................................................................. 124
G4S plc—Written evidence ............................................................................................................ 125
Julian Gall—Written evidence ........................................................................................................ 129
Giant Group plc—Written evidence ............................................................................................ 131
GlaxoSmithKline—Oral evidence (QQ105-114) ....................................................................... 134
HMRC—Oral evidence (QQ1-12) ................................................................................................ 135
HMRC—Oral evidence (QQ115-128) ......................................................................................... 148
HMRC—Supplementary written evidence .................................................................................. 164
HSBC—Written evidence ............................................................................................................... 165
Julius J H Hutson—Written evidence ........................................................................................... 167
Institute of Chartered Accountants in England and Wales (ICAEW)—Oral evidence
(QQ33-41) .......................................................................................................................................... 169
Institute of Chartered Accountants in England and Wales (ICAEW)—Written evidence
............................................................................................................................................................... 180
Institute of Chartered Accountants of Scotland (ICAS)—Written evidence ...................... 190
Institute of Directors (IoD)—Oral evidence (QQ93-104) ...................................................... 194
Institute of Directors (IoD)—Written evidence ........................................................................ 207
Institute of Interim Management (IIM)—Written evidence ..................................................... 210
Interim Management Association (IMA)—Written evidence .................................................. 227
David Kirk—Written evidence ...................................................................................................... 234
Local Government Association (LGA)—Oral evidence (QQ62-73) ..................................... 239
Low Incomes Tax Reform Group (LITRG)—Oral evidence (QQ22-32) ............................. 253
Low Incomes Tax Reform Group (LITRG)—Written evidence ............................................ 254
National Association of Schoolmasters Union of Women Teachers (NASUWT)—Oral
evidence (QQ81-92) ......................................................................................................................... 262
National Association of Schoolmasters Union of Women Teachers (NASUWT)—Written
evidence ............................................................................................................................................... 263
Network Rail—Written evidence ................................................................................................. 287
NHS—Oral evidence (QQ62-73).................................................................................................. 288
Office of Tax Simplification (OTS)—Oral evidence (QQ13-21) ............................................ 289
Office of Tax Simplification (OTS)—Supplementary written evidence ................................. 299
Oil and Gas UK—Oral evidence (QQ74-80) ............................................................................. 301
Oil and Gas UK—Written evidence ............................................................................................. 309
Professional Contractors Group (PCG)—Oral evidence (QQ42-61) .................................. 312
Professional Contractors Group (PCG)—Written evidence ................................................. 335

2 of 377
Professional Contractors Group (PCG)—Supplementary written evidence ...................... 344
Paul Phillips—Written evidence ..................................................................................................... 345
Professional Passport—Written evidence ................................................................................... 346
Recruitment and Employment Confederation (REC)—Written evidence ........................... 351
TaxAid—Oral evidence (QQ81-92) ............................................................................................. 361
Union of Construction, Allied Trades and Technicians (UCATT)—Oral evidence (QQ81-
92) ......................................................................................................................................................... 373
Angela Williams—Written evidence ............................................................................................. 374

3 of 377
Mark Agombar—Written evidence
Mark Agombar—Written evidence

1. I am an individual temporary contractor who works in the legal industry specifically
undertaking electronic document discovery review projects for law firms and review
centres.

2. The work is either obtained through recruitment agencies or directly with the review
centre.

3. The contract of employment is with the recruitment agency acting as an employment
business and work is carried out at the end client or at the review centre if the review
centre has recruited directly. The projects have on average about 15 people but there
are some huge projects every year such as the 120+ reviewer project at Clifford Chance
and the now finished 3 year running project at Hudson Global Resources (Chancery
Lane) where up to 100 reviewers were retained.

4. These projects are paid on an hourly basis where the hours of work and method of
work are dictated and controlled by the end client.

5. The end client provides the place of work, the work, the computer equipment &
software, controls how the work is done and instructs how it is to be done.

6. All the elements of an employer/employee relationship exist.

7. The agencies and end client/review centres though are encouraging the abuse of IR35
and the avoidance of tax and National Insurance.

8. When recruiting (by the recruitment agency or review centre) it is offered to candidates
as to whether they wish to contract PAYE, limited company or Umbrella Company.

9. The agencies will place on the same project PAYE, limited company and umbrella
company contractors all of whom do exactly the same work and all are under the direct
control of the end client/review centre.

10. Using limited/umbrella companies is clearly disguising the fact of employment and is
aiding & abetting the avoidance of tax & National Insurance.

11. The crucial similarity between the candidates, whether PAYE or limited/umbrella
company, is that all candidates use the same route to find work, it is the individual
candidate who is retained and there is total control by the end client over how the work
is carried out.

12. Specifically even where candidate contracts through a limited company/umbrella although
there is a substitution clause this is “false” because there is no real right of substitution
because the end client wants the individual who has specific skills (i.e. in document
review is a qualified lawyer or experienced paralegal or legal executive) and would reject
any substitute. In my experience there has never been any substitution and if the
individual is unable to carry out the project then there is replacement by a new
candidate.
13. Further where the candidate contracts through the limited/umbrella company and where

4 of 377
Mark Agombar—Written evidence
recruited through a recruitment agency the contract between the candidate is with the
agency and the contract between the agency and end client is never disclosed nor is the
candidate made a party to that contract.

14. Those who contract through limited companies have no financial risk as they get paid
weekly/fortnightly on same day as PAYE employees; limited companies do not have paid
when paid contracts; no limited company through an agency has ever not been paid or
had to chase/litigate for payment; limited company workers do no more than PAYE
workers to find work; they do not incur any cost over and above PAYE workers in
finding work; they have no real independent place of business and cannot carry on any
work away from end client place of business; they are more often than not provided
with end client email addresses on the same basis as PAYE workers and are treated
exactly the same as PAYE contract workers.

15. There is prevalent in the document review industry and amongst reviewers who
contract through limited companies an overriding arrogance that they know they are in
reality not outside IR35 and should be PAYE but openly express the view that HMRC
would not dare take on a group of lawyers who are exploiting the tax position and as
such they are safe in continuing their tax & National Insurance exploitation.

16. This view that has been expressed to me personally by a Solicitor (who has no post
qualification private practice experience) and a Barrister (in name who has sat his Bar
exams but has not done Pupillage).

17. Both individuals have worked on document review projects where others have
contracted as PAYE & they have contracted as a limited company. All people on those
projects, regardless of contracting status, obtained the work in the same way and all
were directly controlled by the end client as to how to do the work and what hours
were to be worked.

18. It cannot be right that those who contract through limited companies (more often than
not as sole director/sole shareholder companies & all having the common feature that all
revenue is earnt through contracting income) are able to work on that basis alongside
those who are doing exactly the same job on a PAYE basis, with the same end client and
where they all have obtained that same work through an agency or in the same way as
the PAYE worker.

19. The figures when looked at even on an individual basis for National Insurance alone on
an annual basis are staggering and on a representative basis are eye-watering.

20. The average hourly rate for PAYE for document review is £27.50ph (incl. holiday pay) on
a 40 hour week where overtime of an average of 15 hours at 1.5x hourly rate is the
norm.

21. But just looking at a basic 40 hour week this would mean –
Employee NIC = £83.82
Employer NIC = £131.38

Total = £215.20

5 of 377
Mark Agombar—Written evidence
22. Assuming that a contract worker would get work for 35 weeks per year then this would
total a contribution of £7,532 per PAYE worker per year.

23. The contractor using the limited company to evade National Insurance initially profits
from this amount of £7,532 and it is lost to the public purse in the first instance subject
to any latter corporation tax and income tax assessments.

24. This is because the limited company gets an enhanced hourly rate £30.78 being the PAYE
basic rate of £27.50 ph plus the amount equivalent to what the Employer NIC would
have been of £3.28 ph. The limited company worker will only pay themselves income at
below the National Insurance contribution rate for employer and employee and pay the
balance out as a dividend thereby evading payment of any employer or employee
National Insurance contributions.

25. On an individual basis this amount is staggeringly high and to put it into context is almost
65% of what someone employed full-time at 40 hours per week on the Minimum Wage
would take home after tax.

26. When one looks at a current ongoing situation of the large project running at Clifford
Chance which has been staffed by City Law Solutions and BCL Legal with in excess of
120 reviewers with each billing approx. 55 hours per week at £27.50 PAYE and on a
conservative assessment 65% are contracting through a limited company then the figures
become eye-watering.

27. Here if we just assume 78 people are working through limited companies (120 x 65%)
and just using the £215.20 figure per week from the above then this could be an
immediate possible loss to the public purse of National Insurance of £16,785.60 per
week. The actual figure though per candidate is likely to be higher.

28. This project at Clifford Chance has been running since mid-October (so 10 weeks so far)
which means that extrapolating the above, even on extremely conservative figures, the
possible loss to the public purse of National Insurance could be £167,856.00 so far. It is
relevant to point out that this amount will likely double as this particular project is set to
run for at least another 10 weeks.

29. To look at the document review contractor field more widely there are at any one time
about 300 individuals in London doing document review.

30. With 65% as limited companies (few use umbrella companies as these structures do not
allow the same high levels of tax abuse and National Insurance evasion as do limited
companies) then based on the same 40 hour week at £27.50 ph for 35 weeks giving
£7,532 employee & employer contributions then the 195 limited companies (65% of 300
workers) could be on a yearly basis causing a loss to the public purse of a minimum
£1,468,740 just on National Insurance.

31. Remember that all these individuals are resident in the UK and are users of services
funded by National Insurance notwithstanding that they are not contributors.

32. Changing the legislation so that employment businesses cannot contract with a limited
company to provide staff to an end client where that same agency places PAYE staff for

6 of 377
Mark Agombar—Written evidence
same work to same end client at same time and for end clients to not employ limited
company contractors for same project work where they also at same time retain PAYE
workers for same work would immediately provide to HMRC in lost National Insurance
contributions 50% more than the annual enforcement recovery across the UK for all
IR35 breaches and this just from a very small and narrow pool of people in a very small
employment type.

33. What also needs to be looked at are abuses of IR35 by non-domiciled UK individuals (EU
& non-EU) who are allowed to set up limited companies and abuse the IR35 legislation.
Especially with regard to non-EU workers who set up limited companies for the duration
of their permitted visa stay (2 years typically but up to 5 years in some cases) who then
having received revenue through the limited company return to their home company
without having made any Corporation Tax returns in the relatively safe knowledge that
by allowing the company to be struck off that HMRC will never chase a tax return and
tax payment due to lack of resources.

34. Amending legislation so that these so-called “personal service companies”, which are
used as set out above, cannot be beneficially owned by someone who is not EU
domiciled (i.e. not an EU passport holder or perhaps even not a British passport holder)
will in itself cut out further abuses and significant tax evasion.

35. I shall not deal with corporation tax as this is a separate subject being dealt with
currently by an HMRC consultation following the 2013 Autumn Statement to which I
shall be submitting evidence separately. But suffice to say corporation tax is being evaded
in a massive way by the use of these types of companies and the individuals who operate
them are knowingly making under declarations of tax by not correctly stating on their
personal tax returns that payments received from their limited company should in fact be
treated as though it fell within IR35. Additionally there is massive abuse of allowable
expenses for instance where contractors are claiming meal allowances and travel costs
where on a close analysis these are being fraudulently claimed.

36. I will though mention VAT. Every one of these limited companies is encouraged to
register for VAT under the flat rate scheme and on average they pay VAT to HMRC at
the 15% rate. In reality these limited companies have no qualifying VAT expenditure so
the 5% difference between standard rate charged (20%) and rate paid to HMRC (15%) is
pure profit in the hands of the limited company on which the contractor evades payment
of NIC by only paying an income below the relevant thresholds and paying the rest as
dividend.

37. Assuming that only corporation tax at 20% is paid on this 5% “profit” then 4% is added
to net income available to the contractor and even if the contractor is “honest” in their
dealings and when they fall into higher rate tax and pay the additional dividend rate of tax
32.5% on this VAT profit there is still a net loss of 2.7% to HMRC.

38. To put this in context this means that HMRC is gifting free of tax 2.7% on top of every
invoice a contractor makes through a limited company contract.
39. Using figures from above of 195 contractors each billing 35 weeks x 40 hours x £30.78 =
£8,532,216 @ 2.7% = £226,879.38 which is being gifted by HMRC to individuals or
£1,163.48 per contractor limited company.

7 of 377
Mark Agombar—Written evidence
40. Addressing this VAT loophole, by making true supply of employment services through a
contractor company VAT exempt or that all VAT collected must be paid over in full to
HMRC with no VAT claims being allowed for employment services through a contractor
company, and stopping this unjust enrichment to contractors will in itself in this very
small pool of people return almost a quarter of a million pounds to the public purse on
an annual basis. Perhaps even go so far as abolishing the flat rate scheme.

41. In conclusion there is wide scale tax evasion being undertaken by professionally qualified
individuals who are simply playing the system until the loophole is closed in the arrogant
belief that they form an industry group which is too big for HMRC to take on and in the
misguided belief that their individual actions are not criminal offences.

42. A suggested solution to this, and to protect the public purse, is to amend the
Employment Agencies and Employment Businesses Regulations so as to forbid agencies
to contract with contractor limited companies where individuals on PAYE are being
placed at the same time, for the same work and with the same or similar end clients.

43. This could also be achieved by contractor limited companies only being allowed to
contract directly with the end client to who services are provided and to be paid directly
by that end client and that the contractor limited company has not been introduced to
the end client by an employment agency and similarly such a contract not being allowed
where same type work is being undertaken contemporaneously by contractors on a
PAYE basis for that same end client.

44. Direct benefit to HMRC in each year in NIC and VAT receipts alone from this very small
pool would be an estimated £1.7m.

45. Enforcement against all those individuals who have been evading tax (information easily
obtained from the annual returns that recruitment agencies must make to HMRC and
from company searches against all companies with registered offices at the likes of No
Worries Ltd) for up to just the last 3 years could potentially bring in a minimum £5m.

46. This enforcement would not be targeting those minimum wage earners who have been
forced unknowingly into IR35 abuses and less able to pay fines & back tax but would
target those who consciously took the educated & calculated risk to intentionally abuse
the legislation and evade tax and who are capable of paying fines and back tax from
undeclared earnings.

47. Imagine what other revenues would be received if this were to be implemented across
all industry types.

29 December 2013

8 of 377
Association of Accounting Technicians (AAT) and Chartered Institute of Payroll
Professionals (CIPP)—Written evidence
Association of Accounting Technicians (AAT) and Chartered
Institute of Payroll Professionals (CIPP)—Written evidence

Introduction

The Chartered Institute of Payroll Professionals (CIPP) and the Association of Accounting
Technicians (AAT) are grateful to have the opportunity to comment on the review of the
use of Personal Service Companies. We are pleased to be able to feed into The House of
Lord’s Select Committee’s work and offer support and assistance with further work in this
area.

Purpose of response

This response is to provide feedback to the Select Committee from accounting and payroll
professionals who deal with Personal Service Companies/Intermediaries and IR35 legislation.
The CIPP and AAT carried out a joint survey with its members to understand the views
from both professions.

Summary of key findings

• The effectiveness and efficiency of the intermediaries legislation is not well thought of
by either profession. The general consensus being that it is unclear and confusing, as
is the guidance which needs to be more specific and concise.
• All respondents think that more guidance and advice is needed to aid individuals in
judging the status of business transactions for themselves.
• The majority of respondents think that the legislation should be reformed or even
replaced with a simpler, but not stricter system. Two comments included the need
to clarify the status rules so that someone cannot be employed through a PSC for
more than a year.
• The majority of respondents think that current avenues of consultation on IR35 are
not working.
• The general consensus is that HMRC do not listen to stakeholders, despite there
being a dedicated IR35 forum.
• Some of the guidance seems designed for the client as it has no relevance to the
trader and hence will often be ignored.
• Two thirds of respondents think that individuals are being forced into the use of a
PSC as a prerequisite for being considered for work. There was a mixed response as
to where the responsibility should lie, with the individual or the company. Two
comments also suggested going back to genuine self-employment rules.
• Half of respondents think that PSCs are frequently used in the public sector and two
thirds do not believe that those engaged in public bodies and similar organisations
should be prevented from working through a PSC.
• When looking at the benefits and drawbacks of individuals using PSCs, respondents
were broadly in agreement that there are the benefits of flexibility and freedom from
a personal viewpoint; however the drawbacks are the confusing guidance and the
admin required.
• When additional comments were asked for at the end of the survey, one respondent
said that IR35 legislation would not be necessary if NI and tax were combined.

9 of 377
Association of Accounting Technicians (AAT) and Chartered Institute of Payroll
Professionals (CIPP)—Written evidence
Conclusion

The evidence from this survey shows that current legislation and guidance is not clear
enough, is confusing and it is not necessarily aimed at the right groups of people. Current
consultation methods are not thought to be effective and as such the CIPP and AAT will
support the Committee and work with them in any future consultation work.

CIPP and AAT research

The CIPP and AAT carried out a joint survey to understand the views of both the
accountancy and payroll profession on the use of Personal Service Companies and the IR35
rules. The survey was also published via the CIPP LinkedIn page to obtain views of payroll
professionals who may not be members of either institute. The survey was only available for
a short time (2 weeks) due to time constraints. There were in total 33 respondents; 29
who are members of the AAT and 2 who are members of the CIPP. Both CIPP members
indicated they are also members of the AAT and 2 others indicated they are not members of
either institute (1 from accountancy and 1 from consultancy). Only 7 respondents completed
the whole survey, however when filtering out the responses between CIPP, AAT and non-
member, both non-members skipped all questions after the membership, industry sector and
payroll size questions so did not contribute to the actual PSC/IR35 survey.

Membership statistics

Title: Please indicate which membership body you belong to in respect of the CIPP and the
AAT. If you are a member of both organisations please tick both boxes.

Please indicate which membership body you belong to in
respect of the CIPP and the AAT. If you are a member of
both organisations please tick both boxes.
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
CIPP AAT Not a member of the
CIPP or AAT

Industry sector

Due to the respondent majority belonging to AAT, as expected the majority of responses
were from the accountancy sector followed by the consultancy and book-keeping sectors.
The CIPP responses also covered payroll Bureau/outsourcer.

10 of 377