IR35 - Why it should go

The Intermediaries legislation (IR35) is now 10 years old, but none of us wish to celebrate its anniversary. Even if we were invited to its party most of us would RSVP 'No thank you' or with less polite words amounting to the same thing! After all, this tedious piece of legislation is hardly something that freelancers wish to embrace and regard with any affection.

After a decade of IR35 however, should we be marching upon Westminster en masse armed with flaming torches and various weapons calling for its head or rather letting sleeping dogs lie?

Next week, we will look at the case for keeping the 1999 legislation, but in this article we look at the case against IR35. Once both sides of the argument are put forward, the most important people involved - you the freelancers targeted by IR35 - will be better equipped to decide its fate.

Why Brown's monster was born

On March 9th 1999, Gordon Brown, then chancellor of the exchequer, unveiled his IR35 creation, but it was to be another year before it had life breathed into it. On 6th April 2000, Gordon flicked the switch and with a crash of lightning the monster awoke from its slumber ready to do its master's bidding and roam the UK searching for freelancers to devour.

Why had Gordon unleashed this abomination? Well, as we all know by now, it was in response to tax and NIC (National Insurance Contribution) avoidance. Her Majesty's Revenue & Customs had for some time been concerned about the hiring of individuals through their own service companies, so as to exploit the 'fiscal advantages offered by a corporate structure'. Employees were being handed their P45 on a Friday only to return to the workplace on the following Monday to do exactly the same job but, hey presto, as a contractor this time. Consequently the contractor could now pay themselves dividends and, by so doing, avoid NIC and reduce their tax burden. Something had to be done.

Gordon assured the cowering citizens, however, that his monster would only molest those contractors who were working as disguised employees, i.e. those engagements with essential characteristics of employment. Further appeasement was offered when the good people were told that there was no intention to redefine the boundaries between employment and self-employment and that the impact on ordinary businesses would be minimised. In other words, 'don't be afraid he won't hurt you'!

The non-science of Brown's creation

The problem with IR35 is that it is not a precise science. Its success or failure relies on employment status tests that have evolved through decades of legal decisions, mainly those involving employment law cases. Fitting the facts with case law is not always straightforward as interpretations by HMRC and the freelancer, aided by their trusted advice, can vary enormously. HMRC periodically attempt to move the goalposts by adopting contrary views in areas such as mutuality of obligations and substitution, for instance, making the mountain that bit more difficult to climb.

The parameters are vague and the lines become very blurred at times. There is no formula laid down that if a contractor does A + B + C = IR35.

Why the monster should be killed

Many freelancers would welcome the demise of IR35 and that is perfectly understandable. The IR35 enquiry selection process is indiscriminate and for those who are chosen they can face a long, old boxing match with HMRC that can last a few years.

The longer the enquiry lasts the more stress to the individual it creates as the contractor is left with uncertainty and may have to postpone business investment plans until the outcome is known. This is further exacerbated should the contractor and HMRC reach an impasse and it is left to the courts to decide the contractor's fate.

IR35 creates an uncertainty that hinders a contractor's financial strategy for his/her business. The proverbial Sword of Damocles that perpetually hovers over the head of freelancers distracts their focus being fully fixed on the business. It is burdensome upon the contractor as time and money have to be spent reviewing contracts, establishing working practices, assembling evidence and taking out protective insurances.

In terms of tax yield, IR35 has been unsuccessful and it is most likely that manpower costs have comfortably exceeded the tax take. It has therefore failed to swell the Treasury coffers, rather the contrary!

HMRC may however argue that this is not the whole picture and that IR35 acts as a deterrent causing contractors to abandon a policy of profit extraction by dividend in favour of a more cautious salary. Maybe that was true in the early years but not now, as contractors have become more aware, educated and savvy.

HMRC no longer has the necessary resources to police the legislation as the department has suffered cutbacks and resources have been channelled into more lucrative employment status projects, such as the construction industry.

Why then keep the IR35 monster alive? Surely it is now time to lay it to rest?

Seb Maley, freelancer services manager at Qdos Consulting Limited.

Editor's note: Full coverage of the IR35 Review/Reform here. You may also find our IR35 calculator useful.