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