Contractors' Questions: What to expect from IR35's successor?
Contractor's Question: What is the government currently doing with the IR35 legislation, and is there any word on what the successor to IR35 might look like?
Expert's Answer: The Office of Tax Simplification (OTS) is to carry out a review of the IR35 legislation with the focus on exploring alternatives to it. The OTS is to provide an initial report to the Chancellor by Budget 2011 that:
• identifies and provides evidence of the complexity and uncertainty created by IR35. This should not be too difficult as it is in abundant supply!;
• considers alternative legislative approaches that would be simpler and create certainty whilst ensuring that where personal service companies are used to disguise employment, then any income that is effectively employment income is taxed fairly; and
• considers the scope for tax avoidance and the extent to which alternatives to IR35 would affect it.
As the government is also interested in the structure of the tax system and the employment status test generally, the tests for employment status and the boundaries between employment and self-employment may change.
So given this mandate, what will be the factors that influence alternative IR35? It is likely that the following considerations will help shape Osborne's omen:
• Reluctant employers who, due to recruitment constraints, prefer to engage freelancers rather than employ workers
• Employers avoiding NICs by using freelancers rather than taking on employees
• Ensuring that cavalier employers do not escape their obligations placed on them by employment law and PAYE
• Contractors motivated to set up their own companies simply to avoid tax. IR35 was originally introduced to counter this perceived abuse
• End clients dictating that self-employed contractors operate via personal service companies and by doing so transfer the PAYE/NIC burden to the freelancer
• That the genuinely self-employed should not pay the same amount of tax as employees. If there was tax parity, this would be unfair given that those running bona fide businesses do not have the job security that employee's enjoy
On July 27th, the Government published nine tax-related documents for discussion and consultation, so it is hoped that this trend will continue and that before any new IR35 replacement rules become legislation they will be offered up for consultation. There certainly won't be a shortage of volunteers wishing to add their suggestions.
The expert was Seb Maley, freelancer services manager at Qdos Consulting Limited.
Editor's note: Full coverage of the IR35 Review/Reform here.