Trade unions and employers' organisations have told the House of Lords that HMRC needs to do more step up its monitoring and enforcement activity in relation the use of personal services company (PSC) arrangements, while making sure workers understood their entitlements when employed through PSCs.
The statements - from The National Association of Schoolmasters Union of Women Teachers (NASUWT), together with the Union of Construction, Allied Trades and Technicians (UCATT) and the charity TaxAid during the latest round of evidence to the Lords who are examining tax issues concerning PSCs - revealed examples of members employed via agencies who have PSC status and who also have a relationship with an umbrella payroll company, usually based offshore.
As a result, NASUWT general secretary Chris Keates said that her union was seeing increasing numbers of cases where individuals were being asked to pay both their and employers' NICs due to the structure of the agency that offered them work.
TaxAid technical director Frances Corrie, said: 'There is a fee paid by the end user to the umbrella company from which it deducts expenses which are essentially the employer NICs. That means that what the worker is paid is lower than they expect because they are bearing costs which should fall on the umbrella company.'
Keates said that individuals often did not realise this deduction was being made, because of the way information was presented on their payslip and because they did not understand their entitlements under this form of contract.
Discussing this further, CBI director of employment and skills, Neil Carberry, said HMRC should do more to provide advice and clear guidance about what workers were entitled to under a PSC agreement via an umbrella company.
Carberry also said that HMRC should do more to enforce and monitor the regulations around PSCs and IR35, pointing out that a recent Freedom of Information request suggested a decline in activity. The CBI found that investigations had fallen from 158 in 2007 to 23 in 2011, while the tax take had declined from £1.9m to £290K over the same period.
But the Institute of Directors' head of taxation, Stephen Herring, said that 'even if there was no system of taxation, there would still be increasing numbers of PSCs' which he described as 'the unintended consequence of more competition in the business market.'
Both Herring and Carberry said the need for organisations to find highly skilled people to work on short-term contracts made the flexibility of employing someone via a PSC, rather than as a permanent member of staff, highly attractive.
Herring said that HMRC should not regard the use of a PSC as 'automatic' evidence of tax avoidance, arguing that when the costs of managing the entity were factored in, quite often there was no tax saving.
Both Herring and Carberry told the committee that the current business entity tests should be updated, particularly with regard to the view that having only one source of income automatically suggested that individual should be treated as an employee for tax purposes.
Both also commented in their evidence that the government's 'rights for shares' initiative, announced last year, held little appeal. Under new rules, employees who agree to give up certain employment rights and protections can be granted £2,000 to £50,000 of shares in the company.
Carberry described the approach as 'niche', while Herring suggested the legislation was already ripe for consideration by the Office of Tax Simplification as being 'quite a burden, complex and makes the tax code more complex than it needs to be.'