Killing IR35 would be Autumn Statement 2014's worst outcome

Over the past few years, autumn has become a time when contractors and other professionals affected by tax policy have started to set aside time to consider the contents of the chancellor’s ‘mid-session’ pronouncements, writes IR35 Forum member Jason Piper, technical manager of tax and business law at the ACCA.

Whether these pronouncements are labelled Pre-Budget Report or Autumn Statement, the tendency has been for more and more fiscal policy initiatives to be announced not at the spring Budget, but in the colder days of the closing year. And this year of course for contractors, there’s another, rather more directly focussed, document to consider – the outputs of the IR35 Forum’s Administrative Review of IR35.

Even for those who agree that IR35 is a necessary evil in the fight against tax evasion, the current administrative regime is far from perfect, for all the improvements that may have been made recently. So the opportunity for considered action to reduce the burden on compliant taxpayers, and to make it easier for them to establish that they are indeed compliant, is something to look forward to.

Critics of the regime (and the Forum) will inevitably be disappointed that the review won’t call for the abolition of IR35. But that is simply something that the Forum is not placed to do, even if individual members hold that view. Its work is to try to improve the administration of what we’ve got, by listening to constructive criticism and trying different measures to respond. We’ve already seen one outcome of the recent work, and that’s the announcement of the withdrawal of the Business Entity Tests. The tests were an example of the Forum trying something out. The original aim of using them as a risk indicator (akin to a traffic officer trying to decide between pulling over a rusty Ford Fiesta or a brand new BMW to check for roadworthiness) got lost though, because end-users started relying on them as the definitive test (or, to continue the analogy, substituting the initial ‘eyeball’ test the officer runs for a full mechanical inspection).

So will the rest of the review hold any huge surprises? Well, the one thing it can’t and won’t do is shift the whole landscape of tax for contractors. For that you’d have to look to the chancellor’s speech on December 3rd.

Of course, the final Autumn Statement before the election is bound to be politically-charged. George Osborne will have a fine line to tread, and while there’s always a temptation to build up towards some pre-election sweeteners for the taxpayer, we’re still not out of the woods on the economy, and there’s plenty to occupy him at the macro level and in the international sphere. But for the fact that multinationals account for a disproportionate amount of corporation tax, the whole tax raises less than 10% of the chancellor’s income.

Areas such as income tax, NICs and VAT offer the scope to actually make a real difference, and of course the big win there would be to simplify, align or even merge tax and NICs. There’s more than one column’s worth in that topic, but it’s worth noting here that once you wash out the income vs corporation tax impacts of IR35, the actual margin for the Revenue all turns on the NICs. Equalising the exchequer burden on employed and self-employed would of course remove the incentive to game the tax system, but without addressing the flip side of that coin – the state benefits and legislative protections that employment grants – it would also run the risk of reducing the incentive to be self-employed at all. We might see a continued expression of the desire to do something about that, but with the election looming any concrete measures are perhaps unlikely.

What we do know is that HM Revenue & Customs is keen to build on the recent gains it has made in its powers against those who avoid or evade tax. The detection mechanisms are being ramped up with information-sharing agreements, changes to DOTAS and the stiffening of the regime around international tax arrangements. Further along the process, the collection of tax is seeing some significant changes, with the introduction of Accelerated Payment Notices, Direct Recovery of Debts and enhanced PAYE deduction powers. Whatever happens in May, we shouldn’t expect to see any of those powers relinquished, even if the outcry at more extreme extensions like DRD may see the adoption of safeguards and policies that ensure they remain targeted only at the tiny determined minority.

So will this autumn bring great changes for contractors, or is it going to be ‘business as usual’, perhaps benefitting personally from VAT or income tax focussed breaks, but simply being carried along in the tide with the rest of the tax-paying business world on the broader measures? In some ways of course, stability may be the best option. We can’t know now what the outcome will be in May, but the short term response to any big shift would have to be tempered by the knowledge that it may yet be reversed in the New Year if there is a change of government.

Of course there are changes we’d all like to see. But perhaps right now the best outcome would be some certainty around improvements in administration, rather than the tantalising prospect of major changes which only run the risk of being reversed next summer. It’s hard to think of a scenario worse than this chancellor abolishing IR35 from April only for it to be reintroduced in a new and (even more) unfamiliar form by an incoming successor as an emergency measure two months later.

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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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