IR35 reform on the business wish-list

The chorus of voices willing the Office of Tax Simplification (OTS) to replace the contentious IR35 legislation with simpler measures has been lifted by the Institute of Directors (IoD).

In a paper handed to the OTS, the IoD said IR35 has proved to be an ineffective solution to an issue that has been “cut down” in size, while the rule itself has become “a serious problem.”

The criticisms of the 1999 legislation, spelt out in the IoD’s “initial” IR35 submission to the OTS, are not new, but have so far been concentrated among contractor interest groups.

Confirming the risk to contractors, the IoD reminded that a contractor with a PSC, and indeed HMRC, cannot tell in advance what the outcome of an enquiry will be, explaining why "many enquiries yield no extra tax".

So for the IoD, IR35 reform should involve replacing the existing rules with precise tests or questions for contractors, as well as an initial screening test, which would bypass the need to define a contractor.

“We want to take as many businesses as possible out of the scope of the replacement for IR35 in order to minimise the hassle for businesses,” the IoD’s head of tax, Richard Baron, told CUK.

“If a large number of businesses could take one look at an initial screening test and know straight away that they do not need to worry [about the contractor’s IR35 status], that would be very helpful.”

In its paper, the institute stops short of proposing definitive measures to replace IR35, preferring instead to set up its potential framework, which it says could be implemented in time for April next year.

Under the framework, whether the screen test would need to be re-applied for each contract would depend on the test criteria, such as diversity of income sources, and its validity, which could be for 12 months.

“The test would however need to be one that would allow most contractors to be confident of their likely status for a tax year, or for an engagement, while the year was in progress or before starting the engagement,” Mr Baron wrote in the group's submission.

“Otherwise they might not put enough money by to cover tax and national insurance (NI) liabilities.”

In line with the wording of the coalition’s pledge to have the OTS review IR35, the IoD characterised its proposal as an “acceptable, if still imperfect, solution to the difficulty which IR35 has given rise”.

But it also said its framework responds to the problems IR35 was originally intended to address which, while still evident, are not as significant as when the legislation came into force in 2000.

“The managed service companies’ legislation, which was necessitated by the impracticality of applying IR35 on any large scale, has tackled the bulk incorporation of whole workforces,” the institute said.

It added: “There is a case for some replacement for IR35… [but the legislation has] has turned out to be a bad solution to a problem that has shrunk”.

Thursday 28th October 2010