Taxman wants fresh approach to IR35

The taxman wants to adopt a new, untested approach to the Intermediaries legislation that targets the “specific needs” of contractors within its scope, minutes of the first IR35 Forum meeting will show.

In its role as chairman of the May 6th meeting, HM Revenue & Customs made clear to taxpayer and contractor representatives that statutory changes to the legislation were beyond the forum’s powers.

But in a nod to the group’s terms of reference, centred on improving IR35 administration and restricting reviews to ‘high risk’ cases, the Revenue put forward an entirely “fresh approach” to administering the law.

“It is proposed that this be in line with its [HMRC’s] general approach to risk-based compliance” a Revenue spokesperson added, but it should also “respond to the specific needs of customers within the ambit of IR35.”

Shown the statement, a former tax inspector said the language smacked of a customer segmentation model which, if pursued by HMRC, would require considerable input from industry for it to be accurate and robust.  

Other industry observers prefer HMRC’s talk of following its compliance stance to fashion its new policy on IR35 as suggestive of an amnesty for the self-employed, specifically aimed at IR35-caught contractors. 

Voluntary disclosure facilities have already been offered by HMRC to offshore investors, employee benefit trust users, plumbers, medical professionals and, incoming for the summer, VAT dodgers.

But HMRC tends to launch such clean-up campaigns on the basis of “strong evidence” that tax is being lost through negligence and/or evasion, said Qdos Consulting, a tax and IR35 specialist.

“By offering an 'amnesty' this was an easy and cost neutral way of collecting lost revenue. [But] IR35 is too grey,” said the firm’s freelance services manager Seb Maley.

“HMRC cannot know with any certainty if there are sufficient numbers of contractors who should be applying IR35 but are not doing so.

[So] if a disclosure opportunity [on IR35] was offered I believe it would be a failure. Who would volunteer to accept that IR35 applied to their contracts when there are sufficient arguments that can be put forward to suggest the contrary?”

Whatever the eventual make-up of the Revenue’s new approach to IR35, its administration and its method for identifying ‘high-risk’ taxpayers, the Treasury has said it must succeed in lightening the burden on taxpayers.

Exchequer Secretary David Gauke said: “This as an issue we have to get right if the tax system in this area is to be fair and if professional contractors are to be able to provide their services in the most appropriate way.”

Writing in Freelancing Matters magazine, he added: “The professional contracting community has concerns about the ability and willingness of HMRC to make substantial improvements in the way it administers IR35.

“But I know that HMRC is committed to a complete overhaul of the way IR35 is administered to address these concerns.”

In line with the promise, but with an eye on tax revenues, the Revenue spokesperson reflected: “HMRC is developing a fresh approach to IR35 with the support of the IR35 Forum to support businesses potentially within the scope of these rules, whilst protecting the exchequer by ensuring that everyone pays the right tax.”

Further reading: HMRC publishes IR35 minutes on customer segmentation model

Wednesday 1st June 2011