Scrapping IR35 is not the answer, says Tory official

Hopes among self-employed voters that the Tories' promised review of IR35 may scrap the contentious law have been dashed, after the party said repealing it was not viable.

In an email to a CUK reader, a high-ranking official at Conservative HQ said that revoking the legislation, proposed by Labour in 1999, could result in "unintended consequences."

Although the Tory review team still sees revoking IR35 as an "option", the senior official said it was only one of the potential outcomes, and one that industry doesn't want.

"Having consulted with business tax professionals and freelancers, it is clear that simply scrapping IR35 would not resolve many of [the] issues around the taxation of small businesses.

"Indeed it would, on its own, be the same piecemeal approach which has failed under this government," the Tory official wrote, adding:

"So instead a Conservative Government would undertake a fundamental review of small business taxation matters, including IR35.

"We would mandate the new Office of Tax Simplification to conduct this review, with the aim of creating a comprehensive and lasting regime."

Kate Cottrell, an IR35 advisor, welcomed the sense of realisation in the Tories' statement, saying she was "heartened" the party had listened to those most affected by the law.

"It [also] shows that the Tories understand that abolishing or scrapping IR35 is a completely unrealistic and wholly unworkable measure.

"IR35 underpins lots of other legislation and regulations," she said, pointing to the Managed Service Company rules and the forthcoming Agency Workers' Directive.

Another former tax inspector, Bob, says that solely doing away with IR35, without accompanying tax reform, is not plausible, particularly in the current climate.

He told CUK: "In 39 years' working for the Revenue...in my opinion scrapping IR35 on its own will not work.

"Something will have to take its place but it must not stifle the economy. Coming out of a recession is not the time to be making life difficult for the self-employed".

Seeming to respond to the consensus that IR35 cannot be simply rubbed from the statute book, one of the legislation's fiercest critics appears to have softened its stance.

The Professional Contractors Group, which has lobbied to scrap IR35 since it was introduced, said this week that it wants the law to go or, if not, be "radically simplified."

Asked in February if the group was working up IR35-related proposals for the Tories, as had been reported in the mainstream media at the time, a PCG spokeswoman responded.

"On the issue of IR35, PCG continues its long-standing quest to find a way to correct the unfairness inherent in this piece of legislation," the spokeswoman said.

"As part of that process we continue to engage with all the main parties at Westminster. Obviously, this means discussions with the Conservatives as well as the Government and the Liberal Democrats".

Whether or not the PCG recommended rewriting the IR35 provisions or returning to the tax rules before IR35, it is these two options which the Tories are considering the most carefully.

"Our aim would be to create a clearer, stable and lasting tax regime for the self-employed and small businesses," the Conservative official said in her email.

"The IR35 tax rules are part of a wider problem surrounding the taxation of small businesses by this government. Since 1997, Gordon Brown has constantly tinkered with the tax treatment of the self-employed, husband and wife businesses and other similar small enterprises.

"The result is the worst of worlds for the self employed: uncertainty, unnecessary risk and unfairness."

The PCG agrees, stating in their manifesto: "Working as a freelancer is a legitimate and valid business model. Unfortunately, the law in this area is unclear, meaning freelancers all too often find their employment status questioned.

"The government should provide legal clarity in order to assure freedom to freelancers who genuinely wish to enter into business whilst, at the same time, oppose disguised employment."

Cottrell, who specialises in disputes about employment status, reflected: "I hope too that any [Tory] review would establish some definitions in relation to the one-size-fits-all label of 'small business'.

"At the moment, different types of "worker" are muddled within the small business label, which is why IR35 is currently a necessary tool to differentiate between a worker genuinely in business on their own account and a disguised employee."

However, the economic climate means measures that result from the Tories' promised review of IR35, and small business taxation overall, should not be burdensome for all of the entities who stand to be affected.

"We should encourage enterprise and make it easier for hard working folk to expand their businesses by taking on staff whether truly self employed or truly employed," said Jones.

Continuing his appeal to policymakers, the ex-tax inspector urged: "There is no point in having rules that cannot be implemented so unless the Tories can come up with something that is simple to understand, simple to operate and encourages enterprise, then maybe it would be best to revert to the pre-IR35 days after all."

Ray McMahon, a tax advisor at consultant365.com, said: "Like most advisers and contractors, I would welcome a complete review of the current [tax] situation for all small businesses.

"This could help contractors understand and comply with their obligations. Contractors only want a fair system which they can understand".

Apr 21, 2010