Following this morning’s disappointing launch of the Office of Tax Simplification’s Small Business Tax Review, we have now had some more time to digest the whole document, and have pulled out some more snippets that are relevant and interesting to the self-employed community.

It has long been suspected that although IR35 is a reasonably effective deterrent, it is by no means a money-maker for HMRC, this has been confirmed in the report, which reveals that

“Between 2002/03 and 2007/08, HMRC collected £9.2million in direct revenue from compliance activity.”

Meaning that HMRC collected around £1.8million per year from people who openly declared themselves as inside IR35 – from a population of more than 1.4million freelancers and contractors that is a pretty miniscule amount. Hopefully the realisation of this tiny income from such a costly and unpopular piece of legislation will be a contributing factor in the Chancellor’s decision on whether or not to reform.

The report also admits that although IR35 acts as a deterrent against PAYE employees incorporating, The OTS could not find any evidence that it has actually curbed the practise. The report takes into account the avoidance rules of other countries, such as the USA, Canada and New Zealand, some of whom operate General Anti-Avoidance Rules.

Despite it’s proposals, the OTS admit that “the reality of the situation is that there is probably no clear cut legislative alternative that addresses the concerns of all parties,” and that “the population affected by IR35 is extremely diverse and an alternative to IR35 that uses a “one size fits all” approach is unlikely to work.”

Despite the best of intentions, the OTS Report still falls a long way short of the clarity many freelancers and contractors were hoping for. They suggest three distinct options, but do not indicate which they would favour, or for what reason.

The obvious choice for the self-employed community is the first option – suspend IR35 while a review takes place into the alternatives, with a view to permanent abolishment. The report recognises this, stating that “based on views heard by the OTS, this measure would be very welcome amongst the contractor community.”

The report makes its suggestions within the context of a merger between Income Tax and National Insurance Contributions. This is one interesting facet of the report, as such a merger would reduce the administrative burden of two separate taxes, while also bringing in more revenue. If any of the report’s solutions are enacted, the cost of enforcing IR35 would also disappear or drop dramatically – it is clear that this report is also focusing on bringing in more money overall, as well as simplification.

The general tone of the report is decidedly anti-IR35, it repeatedly highlights the undue burden on the freelancing community, as well as the inherent uncertainties with the current legislation. The PCG has issued a press release calling on the Chancellor to opt for IR35 abolition over the other proposed solutions.

We will be detailing the potential impacts of all three of the proposed options in further coverage.

Let us know your views on the OTS Review in the comments!

Photo by Paula Bailey – CC