IR35 is to undergo a review by HMRC with the objective of increasing its effectiveness and improving its tax yield, as the government “wants to find a solution that protects the Exchequer and improves fairness in the system”.
“Measures to tackle the very real problem of disguised employment are to be welcomed, as genuine contractors have nothing to fear from this type of anti-avoidance legislation,” believes ContractorCalculator CEO Dave Chaplin.
“So we welcome any review of the existing legislation, as IR35 in its current form is not fit for purpose. However, my concern is that the government believes a reformed IR35 will magically generate an additional £400m in tax revenues, but this just won’t happen.
“And unless the legislation is fundamentally reformed so that it is no longer based on the subjective tests of employment and employment case law, contractors will remain uncertain about their tax position.”
The plan to review IR35 is one of several major initiatives announced by the Chancellor George Osborne in his Summer Budget that directly target contractors, which include major dividend tax reforms and a consultation on umbrella and personal service company contractor expenses.
“The government recognises that many individuals choose to work through their own limited company,” says the Treasury in the Summer Budget 2015 document, “However, where people would have been employees if they were providing their services directly, anti-avoidance legislation commonly known as IR35 introduced in 2000 requires that they pay broadly the same tax and National Insurance as other employees.
“As highlighted by reports from the Office of Tax Simplification and the House of Lords, it is clear that IR35 is not effective enough. Non-compliance in this area is estimated to cost over £400 million a year.”
The document goes on to say that the government will “engage with stakeholders this year” on establishing how IR35’s effectiveness, which presumably means its tax yield, can be improved.
“We have repeatedly called into question the loss of revenue to the Exchequer that HMRC claims is represented by IR35’s failings,” continues Chaplin. “HMRC’s assumptions underlying IR35’s Exchequer risk are seriously flawed, and are based on factors that we have proved to be incorrect.”
A discussion document is due to be published after the Summer Budget that HMRC is expected to use to “start a dialogue with business on how to improve the effectiveness of existing IR35 legislation”.
Chaplin concludes: “Our greatest fear is that the consultation will ignore the contribution of IR35’s greatest stakeholder - contractors. ContractorCalculator will report step-by-step on progress to ensure IR35’s review is conducted fairly.”