Tag Archive | "abolition of IR35"

IR35 Changes Causing Concern

Another day, another IR35 bombshell that will shock nobody bar HMRC (probably). A new survey conducted by Robert Half has found that more than three in five senior decision makers are either very concerned or somewhat concerned that IR35 changes, due in April next year, will make it hard for them to attract temporary workers. 

So, let’s reiterate. The majority of decision marketing in big and medium sized companies believe that IR35 is going to negatively impact their business. However, we choose to say it, it hardly makes for great reading, does it? 

The survey questioned 398 medium to large sized UK businesses about the impact that they thought IR35 may have for them. The concern they have isn’t limited to attracting new contractors either. Nearly half are also concerned about the possibility of losing contractors that they already have working for them. 

HMRC believes that up to 90% of independent contractor companies are not complying with IR35 off-payroll working rules. The new legislation will mean that many contractors will need to renegotiate their existing contracts if they fall within IR35 statutes, to ensure that they are not financially compromised by the new tax pressures that HMRC are looking to exert on them. However, only 15% of employers say that they are willing to pay better rates to keep their existing contractors, or secure new ones. 

This is at a time in the world economy where the need for contractors, and the desires of people to work for themselves is ever increasing and leaves the whole thing …well, for want of a better way of saying it…in a right bloody mess.

As more and more business and independent bodies are calling on the government to pause and review IR35 legislation, last month, Contactor UK rallied the troops by writing to all MPS asking them to oppose the imminent IR35 changes and to vote against it being included in any finance bill. They also asked them to propose HMRC looks for a fairer system for contactors and to suspend any activity around the Loan Charge. 

So that leaves things just about as clear as they have always been… meaning it’s still an absolute minefield, nobody has a clue what’s going to happen when the laws finally pass and if there’s a chance it may actually get a last-gasp reverse in Parliament. 

Remind you of anything???

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IR35 – The war is not won….yet

Big news of the day is the release of the Office for Tax Simplification’s report on Small Business Taxation. Well, big news for freelance contractors anyway. This is because this is the report that lays out what they think should happen to IR35. And it’s received a resoundingly cautious welcome from people like the PCG.

So not all good news then?

The main recommendation is that HMG bites the bullet and merges PAYE and NICs into a single tax. This is something that’s been around for a while – the Mirrlees report said exactly the same thing last year, as did a Treasury consultation from 2007. Except we didn’t really have a functional government back then and it went in the “Too difficult” box.

However merging the two has a lot of useful side effects, such as eliminating the advantage of payment through dividends, which among other things would make IR35 completely unnecessary. Which has to be a good thing in anybody’s book.

The snag is this will take years to bring into effect and the more you look at what’s involved the more complicated it gets. For example, the tax system recognises the difference between earned income and risk-based investment income and taxes them separately so as to encourage entrepreneurialism. Pensioners don’t pay NICs, so would need their own separate tax treatment. And so on – getting from here to there is a complicated and politically dangerous road.

But the report goes on to say that if that basic principle is adopted, then IR35 should be suspended with immediate effect. This suspension would allow HMRC to focus on other, frankly rather more important areas of tax gathering – you know, the ones that actually return more than they cost to collect – as well as showing what would happen to tax revenues if IR35 was simply abolished outright. So, for example, all those people who work through umbrella companies out of fear of IR35 may well incorporate and get the benefits of being a real contractor. There may be a rush of companies pushing their employees into turning freelance, which is what IR35 was supposed to prevent (it didn’t, as it happens, but let’s not go into that right now). There’s also a whole industry built on the existence of IR35 that would go into a sharp decline. So lot’s of potential issues to be resolved.

To be fair the report also suggests two other options; firstly that IR35 remains and HMRC are far more sensible, responsible and systematic in the pursuit of its enforcement (which caused me some hilarity and probably wins this weeks Littlejohn prize for “You couldn’t make it up”) or secondly the adoption of a series of tests that put you outside the scope of the IR35 legislation, clearly and simply.

So why a “cautious welcome” from the PG, who have been pushing for the abolition of IR35 for a long time? They are totally in favour of the suspension of IR35 as a step towards its removal but suspensions can be reversed, so it’s not the 100% solution they were hoping for. They also support the idea of the “in business” tests (as does the IoD, come to that), but are not exactly in favour of the “HMRC taking more care option” – to quote them, “This is widely regarded as risible”. And of course, it is all dependent on Mr Osborne taking note of and accepting the main recommendation for merger.

Still, it is a huge step forward and PCG deserve all credit for their work in getting us to this point. The war is not yet won, but we have perhaps now won the El Alamein battle for the abolition of IR35.

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

© 2011 All rights reserved. Reproduction in whole or in part without permission is prohibited<

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