Orange & Gold Blog

Small Business Tax Review Announced

Today the Office of Tax Simplification has published it’s second report - “Small Business Tax Review”.  This includes reviews and recommendations about the future of IR35.

The report has been published at

http://www.hm-treasury.gov.uk/d/ots_small_business_interim_report.pdf   

and has been presented to the Chancellor for consideration before his Budget later this month.  The report gives us an insight into the likely way forward the Government will take IR35 and other aspects of small business taxation.  In the report IR35 is thought primarily as providing uncertainty of tax liability, so the OTS has sought to recommend changes that significantly reduce uncertainty to the tax payer without reducing tax revenues to the Exchequer.

With regard to changes to IR35 the options presented, very briefly, are:-

Option 1 – Suspend IR35 with the intention of permanent abolition

This plan appears to involve HMRC announcing a suspension of IR35 checks and reviews, relying on tax payers to apply the law appropriately, whilst the Government seeks to unify the treatment of tax and NI for small businesses.

Option 2 – Keep IR35 legislation unchanged but improve the way it is administered by HMRC

This option appears to involve HMRC streamlining their approach to IR35 checks and better targeting abuse of the system.  The hope here is that there will be an improvement in the perception of IR35 by tax payers through clarity of procedures.

Option 3 – Use a genuine business test to exempt certain individuals

This option does not appear to carry the same level of conviction in the report as options 1 and 2 above. 

This looks to apply a set of business tests, some or all of which would have to be passed by a business to guarantee exemption from IR35.  Similar legislation exists in many other countries including Germany and Australia.

The OTS report also identifies two specific options that it has discarded:-

(a)  Placing the onus to establish IR35 status on the Engager, i.e. the end-client; and,

(b)  Establishing a minimum salary at the rate of national minimum wage for all company directors.

We have not digested the full content of the report yet and in light of the fact that the Budget is just around the corner we will delay further commentary until we know the Chancellor’s response to the report.  We will update you as soon as possible after the Budget.