In its report, the committee described IR35 as ‘complex’ and criticised HMRC for not knowing enough about how many workers it affected or how much revenue was at risk.

Baroness Noakes,  the select committee chairman, said: ‘HMRC failed to demonstrate that they had a sound basis for the £550m of tax and national insurance that they cited as being at risk if IR35 were to be abolished or suspended.   The deterrent nature of the IR35 legislation is its main rationale.

‘We recommend that HMRC publish a detailed assessment of this figure and we also call for an assessment to be made of the cost to the taxpayers affected by the rules.’

HMRC initially told the committee that the Exchequer risk was £475m but then revised this figure to £550m. This is based on a tax yield of £30m and tax protection of £520m, which includes £115m from people who currently provide their services through a PSC and £405m from workers who are currently directly employed, but would opt to provide their services via a PSC, were it not for IR35.

The report states: ‘This figure is an estimate and was not, in our view, directly substantiated by any publicly available information.’

The committee also wants HMRC to look again at whether they require complete and accurate responses to the ‘service company’ questions on the personal tax return SA100 and the RTI employer year end declaration, saying ‘we did not understand HMRC’s rationale for asking questions on the tax returns but not considering their completion as important or insisting that taxpayers complete them’.

As well as considering making these questions compulsory, with penalties for non-completion or incorrect answers, the committee said HMRC should consult on revising the Business Entity Tests so they provided greater certainty to taxpayers. It also wants improvements to HMRC’s Contract Review Service and a review of the membership of the IR35 Forum.

Chris Bryce, CEO of PCG said the select committee’s report demonstrated that the justification for IR35 was built on ‘smoke and mirrors’.  

‘We are calling for IR35 to be suspended while proper consideration is given to its abolition. The government has refused to listen to the cries for help from the hundreds of thousands of contractors, freelancers and independent professionals blighted by IR35, but they cannot ignore the findings of the committee,’ Bryce said.

The select committee also said it was essential to rebuild confidence in public sector management of off-payroll engagements as current IR35 guidance was implemented inconsistently across departments, and there were no clear figures on how many people were ‘hired’ under PSC status by government departments.

It also said lower paid workers should be given more information about their reduced employment rights under PSC contracts, and the government should consider combining  the tax and national insurance regimes as a way of simplifying the system and removing the need for legislation such as IR35 to tackle cases of avoidance and abuse.

The government is expected to respond to the report within two months. A debate in the House of Lords will follow.

The full report is available here: http://www.parliament.uk/business/committees/committees-a-z/lords-select/personal-service-companies/