As part of our coverage of the Office of Tax Simplification’s Small Business Tax Review, we’re exploring the three options for IR35 reform laid out in the report. The information below comes from our sister site, Contractor Advisor – where you will find lots more useful information on all things Contractor-y.
Following last week’s publication of the Office of Tax Simplification’s report on IR35, Contractor Advisor looks at the possibility of suspending the employment legislation altogether, and the impact that could have on the self-employment community at large.
Indefinitely scrapping IR35 would certainly represent a major gamble for the Exchequer. However, it would also enable them to discover what life really would be like without IR35, and of course, if they don’t like it they can always bring it back.
The OTS suggested suspending IR35 as a short-term option for simplifying the tax system ahead of a longer term solution involving the tying together of income tax and National Insurance.
The benefits of suspending IR35
By temporarily abolishing IR35, the Exchequer will have an opportunity to analyse the impact a permanent move might have. There are a number of ways they can do this. Firstly, they monitor any increases in the number of people starting up their own limited companies. Secondly, they can observe any changes in salaries self-awarded by limited company directors. Thirdly, they can see if any patterns emerge of an increasing number of contractors working via umbrella companies jumping ship.
The contracting community will obviously benefit from the reduction in red tape that scrapping IR35 will necessitate. There will be no more undue concern over contract terms and conditions and perhaps a decrease in the need for specialist accountancy advice. By removing much of the uncertainty surrounding employment legislation, it could encourage genuine entrepreneurship.
It won’t just be the contractors and limited company owners who will benefit, the client will also feel safer and more secure in employing their services. The legislative straightjacket on flexible working will effectively be loosened, which can only be a good thing for the wider economy during difficult economic times.
The drawbacks of suspending IR35
The big risk for the Government is that tax motivated limited company start-ups will likely increase – at least until an integration of income tax and National Insurance takes place, which will take some time. Some might see it as a green light to those who seek to avoid tax. For example, will we see more employees suspiciously becoming ‘independent’ contractors? From a purely financial point of view, HMRC won’t be losing out too much – the OTS report revealed they made only £9.2million over seven years.
In 2008-09, 9500 individuals declared being inside IR35. That’s a lot of people paying their fair share who presumably would no longer need to. Calculations done by the OTS show that if large numbers of employees choose to incorporate the Exchequer could lose £200million per year, however that is based largely on conjecture.
Will it happen?
The likelihood of IR35 being suspended seems fairly small. It seems too much of a risk in the current economic climate, as well as an awkward political issue which could see HMRC being accused of legitimising short-term tax avoidance. However, the data that would be provided by a suspension would make for interesting analysis.
Nonetheless, I won’t expect to see George Osbourne slamming down his red briefcase and announcing the end of IR35 on March 23rd.
Photo by The Prime Minister’s Office - CC
