OTS status review 'bound to have knock-on effect on IR35'

Most IR35 advisers oppose the Office of Tax Simplification’s employment status review, with both those in favour and against saying that the legislation will be impacted as a result.

Asked yesterday by ContractorUK whether they welcomed the OTS probe, one IR35 adviser was firmly in favour, another was optimistic but three sounded partly or fully opposed.

The 1999 legislation in which they specialise not being considered, as stipulated by the OTS in the review’s terms of reference, is not the cause of their opposition, however.

On the contrary, some of the advisers warned that, due to the areas of employment status that the OTS is going to consider, at least some implications for IR35 are almost inevitable.

Although it backs the review, status advisory Qdos said: “Any recommendations that OTS makes to improve the tests of employment/self-employment are bound to have a knock-on effect for IR35”.

The Law Place, which is firmly against the now-underway review, agreed: “Reform of the existing employment status tests is likely to have an (unintended) impact on IR35”.

This, the advisory explained, is because the case law dealing with substitution and the other tests affect a person’s employment status, which IR35 regulates where PSCs are involved.

The Law Place’s founder Martyn Valentine added that any changes recommended (and taken up) to the Employment Rights Act 1996 (including section 230), would also affect IR35.

His concern is that such reforms, to the act or the tests, would “take up significant Parliamentary time and create uncertainty at time of fragile economic recovery.”

“OTS may be opening a can of worms,” he warned. “The review is likely to undermine the very flexibility inherent in existing case law which has encouraged growth in the economy.”

But is that same case law, notably the Ready Mix Concrete (RMC) judgment of 1968, which Qdos says is the reason why the review of employment status is overdue, and should be embraced.

“The vast majority of status decisions are still based on the principles laid down by a case that is over 40 years old, that being RMC,” reflected Qdos’ Andy Vessey.

“Whilst that ruling has served us well, the whole concept of employment status needs to move into the 21st century as times -- and working methods -- have changed.”

Yet the shift in the UK’s working practices has no impact on the technical point of law and, in itself, is not a viable reason to conduct a review, according to ClearSky Accounting.

“The fundamentals of determining employment status have not changed. What has changed is that the traditional notion of a job for life has gone”, reflected ClearSky’s Derek Kelly.

“[But] the case law for the treatment of employment versus self-employment is well established. Most of it, such as the Ready Mixed Concrete case, goes back decades”.

Interfering with the principles and tests laid down in the RMC ruling is problematical, thinks Kelly, partly as several cases since then have relied on it to determine employment status.  

It is interference that appeared to bother another IR35 expert, Egos Ltd, when the legal firm was asked yesterday about whether it welcomed the review into employment status.

It said in a statement: “When government interferes and creates different tests for different purposes, or moves the goalposts for the tax aspect only, it creates ill-feeling and injustice”.

The firm’s Roger Sinclair cited April’s revised agency tax rules as an example of the ‘moving of goalposts’ that has left some self-employed people taxed as if they were employees.

He added: “Since the OTS review is likely to only be concerned about the tax aspects of employment, I suspect it may well be the wrong body to…carry out such a review.

“The end result is likely to be a movement in one direction only, and that would only likely be justified if employment status for the purposes of employee rights, and for the purposes of tax, were to be brought back in line with each other.”

What the OTS should recommend, according to accountancy firm DNS Associates, is for the government to create “a massive campaign” to roll out “simple” employment status tests.

These tests would reflect principles of employment/self employment and should replace IR35, so status could be clearer-cut, and less about an assessment of “every minute detail.”

Even more optimistically, the firm hopes that the tests could become mandatory for PSCs, in that they would be required to take them every year at the taxman’s behest.

Sounding aware that his plan might be unpopular with PSCs, the firm’s Sumit Agarwal reassured: “On the whole… [it would] take out much of the ambiguity of the current system”.

The OTS is using similar wording, saying it aims to consider if employment status tests cause “real uncertainty” – a worthy objective that all workers will welcome, believes Mr Vessey.

“With what we have got at the moment, there are too many grey areas that inevitably lead to uncertainty,” he said. “Therefore this review can only be for the betterment of status.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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