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IR35 – 12 years on and still nobody knows if they’re in or out

IR35 – 12 years on and still nobody knows if they’re in or out

In the aftermath of the Lester affair, I have managed to get involved in a bit of a debate has sprung up about what actually is a freelancer. This might seem a fairly trivial and straightforward question, but as you dig deeper into the reasons why IR35 was brought in, it all gets just a little complicated.

As the 12th birthday of IR35 rapidly approaches, it’s worth reflecting on why it was introduced. After all there is a whole generation of freelancers out there who have never known life without its Damoclean presence. And who may not know its gestation

Originally it was promoted as a way to recover taxes from people who left their permanent positions, had a nice weekend off, and then returned as a fully-fledged contract worker doing exactly the same role for exactly the same people. Nothing to do with freelance work, everything to do with them getting more take home by taking advantage of corporate taxation rates and their erstwhile employer not having to worry about little things like Employers NICs and holiday pay any more.

And you have to accept that is actually not a totally stupid idea. Certainly HMG accepted it as a rationale and after a couple of false starts, brought in the IR35 we know and love.

Snag is this was the Tony Blair government we’re talking about here. It may just be coincidence but IR35 was drafted so poorly that nobody knew who was actually in its scope; the Friday-to-Monday brigade clearly was, but so was every other one man band out there. And that’s when the fur started to fly and the PCG came into being.

It’s also worth noting the shift in emphasis by HMG themselves. They were clear that “genuine businesses have nothing to fear from IR35”, which they probably wouldn’t have if anyone could define a genuine business. In 2002, in the House, the then Postmaster General expanded on her concept of IR35: apparently it was now meant to apply to people who used a Limited Company to avoid paying the correct taxes. Which is fine apart from there still being no way to distinguish my company from Richard Branson’s without taking it to court. But the point is that the original intent seems somehow to have gone walkies and IR35 is now being presented as a general taxation measure to which all sorts of people are liable.

Scroll forward ten years and we have Osborne saying that he has to keep IR35 to protect a taxation revenue stream, from which we can assume that he was still sold on the original idea of IR35 as a preventative measure and not as a tax gathering one. Shame nobody told HMRC that, really…

So after all this time we are still in this idiot position of trying to prove we are genuinely in business should HMRC suddenly present us with a £90,000 tax bill. And as we have seen, that is a path fraught with peril and pitfalls. To my simple mind the fact I don’t have a constant income stream, I have to pay for all sorts of things that employees don’t, I am always at risk of not being paid at all and I have multiple clients a year would seem to say I am a business, but sadly that doesn’t count for much in the eyes of the law. After all, where’s my factory, my employees and my pile of manufactured widgets? Which is about as far as HMRC’s understanding of a business stretches

For IR35 to be applied as per its original intention – if we allow that the original intention is the only one that counts – is actually really obvious. If your client now is the same as your previous employer, it’s up to you to prove that IR35 doesn’t apply by using existing case law. If you’ve never worked for your client before, IR35 can’t possibly apply. How hard is that?

Clearly, very hard. 12 years on and still nobody knows if they’re in or out.

About the author: Alan Watts

Alan has worked in IT for most of the last 35 years, and first went freelance in 1996. He has been a PCG member from its start and has been spreading the message that freelancing is a professional career choice for many years. Alan also runs Malvolio’s Blog, a personal but highly informative take on the life of the modern freelance.

Alan Watts, Principal Consultant, LPW Computer Services

© 2012 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: I don’t know by cowbite

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