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 following analysis comes to you straight from our sister site, Contractor Advisor – where you will find lots more useful information on all things Contractor-y.
As part of its report on simplifying Tax for small businesses, the Office of Tax Simplification raised two possible short-term solutions. One was to suspend IR35 with immediate effect, and the other was to keep IR35 but improve how it is administered.
It’s time to ask: should we really consider keeping IR35? Though most contractors would firmly reject the idea, it’s only fair that we examine the argument put forward by the OTS…
The first thing to mention is that the OTS’s big idea for simplifying this tricky area of tax legislation lies in a long-term restructuring of the tax system. They believe that merging income tax with National Insurance will largely make IR35 redundant. However, such radical change will take a long time to achieve – if it’s achieved at all – so, other measures are needed to help contractors andfreelancers in the short-term. The question is, can there really be a case for retaining this complex piece of legislation? It’s called the Office of Tax Simplification, not the Office of Tax Continuation, after all.
The OTS says that under this plan, IR35 will remain but with a commitment to specific changes to provide better support to the IR35 affected population. By gaining feedback from contractors and contractor groups (such as the PCG), the OTS has found anecdotal evidence that the burden of IR35 has decreased over the ten plus years that it has been in existence.
And this does make sense. After all, experience makes people more savvy and the number of specialist contractor accountants has increased, providing specialist services for those particularly concerned about their employment status. The number of websites and blogs offering advice on the issue has also helped increase awareness and understanding. It’s a typical case of the better the devil you know.
The OTS isn’t complacent on this issue and makes clear that even those with an improved understanding of IR35 are still left with an unnecessary administrative burden. That’s why they recommend taking steps to simplify it in its current form.
One of the key ideas is to create a list of genuine business criteria which could be used by a contractor to self-certify their employment status. Alternatively, HMRC could publish a list of what practices are likely to attract an investigation. Another suggestion is to eliminate the risk of investigation for those who have taken ‘reasonable care’ to clarify their IR35 status (by undertaking an IR35 review of contracts, for example).
The OTS also recommends more clarity and transparency over HMRC’s investigation process. The aim would be to give 90 per cent of those currently concerned by IR35 more certainty over their status.
Unfortunately much of this is rather vague. For IR35 to remain in place, constructing a truly effective IR35 test will be vital in offering contractors piece of mind. The results of such a test will have to give certainty to contractors and small businesses.