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If it ain’t broke…

If it ain’t broke…

Don’t fix it, goes the old cliché. But how about if it is broke, don’t fix it either? Why not simply get rid of it?

Now the Office of Tax Simplification is up and running, many bodies have been making their submissions on how they think things should be changed. And needless to say the abortion that is IR35 comes in for a lot of debate. Which is nice.

However I am struck by the fact that almost all that debate is centred around how it could be made to work better. Make it more fair, make when it applies a lot more clear, make it more of a level playing field. No, says I, you don’t want to do that…

Let’s think about why we have IR35 at all. If you work through a Limited Company, you gain certain advantages in how you convert gross into personal income. This means that it is not all that difficult to switch from employment to freelancing, trading through a limited Company that has no other purpose than to save you tax and NICs.

This, clearly, is a bad thing. Especially if you are an unimaginative MP from South Bristol well known locally for an inability not to jump on bandwagons.

So in comes IR35, which is not meant to stop people switching from employment to freelancing but simply to make sure that they pay the same tax as those who chose to stay as wage slaves. OK, it is a model of NL legislation, poorly conceived, poorly drafted, utterly incomprehensible and all in all about as effective as a chocolate fireguard.

But, and it’s a big but, nobody is asking why we have to work through limited companies. So rather than fix IR35, let’s fix the root cause. Which is the legislation that makes the intermediary company liable for any unpaid taxes. Which is why we have small companies. Which is why we have IR35.

So, change the law slightly so that the worker, not any other intermediary, is liable for their unpaid taxes. Then agencies can use sole traders, a status that has a recognised legal framework. It means no more debate about the nonsensical 24 month rule on expenses. You can be registered for VAT, you get working expenses and you can ignore those people who say you are only pretending to be a business. If you want a limited company you can have one: but if all you do with it is move its income to your bank account, be prepared for HMRC to declare it a sham. Hire people, reinvest income in growth, build a list of assets, then no problem.

Is that not a simple solution?

Incidentally, the members of the OTS have been announced. Number 6 in that list is one Christopher Bryce who, as you may know, is current chairman of the PCG. His being there is not only a huge endorsement of PCG’s ten year struggle for recognition but a major step forward in the fight to get rid of IR35 altogether.

Let’s hope he reads this blog…

Alan Watts can found at LinkedIn.
© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Bob the Builder by Dustin C Oliver

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