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.

The OTS Small Business Tax Review, which was released last week to barely-audible fanfare ahead of the Chancellor’s Budget on March 23rd, threw up three potential changes to the way IR35 currently operates. The first suggestion was to suspend IR35 completely, the second was to amend IR35 enforcement, and the third was to introduce a definitive Business Test, the aim being to provide some certainty for freelancers and contractors who may be affected by the legislation.

The Business Test is being suggested as both a standalone measure, and possibly one that can sit alongside other IR35 reforms. The report says of the test -

“Although this option is not an immediate simplification (and would require more definitions and tests) it would aim to reduce radically the size of the population potentially caught by the IR35 legislation and thereby remove a large number of contractors from the worry of a potential IR35 enquiry.

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“This proposal would establish a range of simple tests that those within the ambit of IR35 could apply to their situation and be able to depend on the outcome through having a ‘safe haven’. This aim would be that the great majority (90%+) of such businesses would know that they were outside IR35, and attention (of advisers, businesses and HMRC) could focus on the remainder. The test would be in addition to the current rules and the uncertainty these create.”

The trick, however, to getting such a test right will be ensuring it is, in fact, definitive, and doesn’t serve to create yet more confusion amongst the IR35-affected community. The report acknowledges these difficulties -

“The key problem would be how the tests were defined. To give one illustration, consider the one that suggests that a business with X or more customers would be outside IR35. How would customer be defined? A common sense definition could work, but what happens when a legal challenge is mounted?”

This speculation from OTS – combined with the fact that they offer no concrete solution – seems to somewhat void the Business Test suggestion before it is even out of the gate. How would they be able to improve on the currently accepted tests, such as Mutuality of Obligation, Substitution, or Direction & Control? What metrics would be measured, and what safeguards would be put in place to stop people simply skewing those metrics to avoid HMRC’s ire?

Although a definitive test is an excellent idea in theory, the intricacies of tax law (which, to their credit, the OTS are attempting to cut down) mean that many aspects of any potential test would still be open to interpretation. Can a Government-defined test help clear up IR35 uncertainty? We think it can, but not enough to be genuinely helpful.

Photo by Horia Varlan - CC