IR35 future

Budget Announcement on IR35 March 2011

Well now we know. The Tories are not planning to abolish IR35. The Chancellor has stated that to abolish IR35 would "put substantial revenue at risk". Presumably he is worried about thousands of umbrella workers incorporating overnight. In fact, the Chancellor appears to have rejected all proposals put forward by the OTS earlier this month on ways forward to improve or remove IR35. This is what the Treasury have published in yesterday's Budget papers:

Following the publication of the OTS review of small business tax, the Government commits to making clear improvements in the way IR35 is administered. These improvements will include setting up a dedicated helpline staffed by specialists, publishing guidance on those types of cases HMRC view as outside the scope of IR35, targeting compliance activity by restricting reviews to high risk cases and setting up an IR35 Forum which will monitor HMRC's new approach. The Government has decided to retain IR35, as abolition would put substantial revenue at risk.

Perhaps we are overly sceptical, but in our view this looks as if nothing significant will change. You still have to consider IR35 on each contract assignment. The dedicated helpline will carry the same concern as the original one in that HMRC will favour their own interpretation and not be independent. They already provide 'guidance' but it is again a partial view. And what is a 'high risk case'? The IR35 Forum is, presumably, a watchdog of some sort. It all adds up to very little.

Small Business Tax Review Announced

Today, 10th March 2011, 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 on the Treasury website. 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 administration

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.