Tag Archive | "son of ir35"

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

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So what am I doing wrong?

There’s been mixed reactions to the Coalition’s plans for the promised IR35 review. Mostly people see the announcement in the Budget as a positive step forward, and even those who previously seemed to have found a new enthusiasm for IR35 seem to have gone quiet.

And you have to admit that Mark Prisk’s reported comments, indicating that IR35 as it stands is doomed, was welcome news, if they were accurately reported.

Of course there are still those who demand immediate action and the instant repeal of IR35 and all its manifest evils, but I fear they are to be disappointed. Let’s face it, we are talking about Government decision making here. Despite the obvious urgency and energy of our new masters, they work at a speed that makes geological time seem positively reckless.

The other thing that keeps coming up everywhere is “What do we replace it with?” I know I wrote about son of IR35 recently, but this constant drip feed of suggestions for how it can be re-worked is beginning to irritate.

For one thing, nobody has yet persuaded me that it needs to be replaced. In my case, I own a Limited Company through which I provide various services to a range of clients (including this blog, for example). The company has been around for many years, is operated in accordance with all the relevant laws and pays all its required taxes without a murmur (well, not a very loud one, anyway…).

So why is there a clamour to single me out as some kind of anomaly and insist that I have to operate under some differential taxation regime because I don’t aim to become a rival to Accenture? Actually I am a rival to Accenture in many ways, but let’s not go there just yet!

With or without IR35, I would still use my company to sell my services, that’s what it does. So what am I doing wrong that some people demand I become some form of special case?

My hope is that HMG and the Office of Tax Simplification will see sense and cancel IR35 with no thought of replacing it. I admit they may take a longer look at small company taxation in the round, but that should be against all small companies equally. Those who for various reasons only have one or two workers are no different to bigger small companies, if you see what I mean, so why should they need different treatment?

On a different subject, I was talking with my last clients recently, who are in the Public Sector, and asked them how they were planning to cope with the impending cuts in public expenditure. Seems they are actually quite relaxed about them, since they’ve been working a programme of examining expenditure and optimising their budget management for several years now. They are confident that they’ve already made the level of savings expected of them. So you have to ask, if that one organisation can do that so successfully, why can’t all of them…?

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