What is going to happen to IR35?
The newly formed Office for Tax Simplification (OTS) is carrying
out a review of UK tax legislation, including those tax laws that
affect freelance contractors. Nasa Consulting has been involved in
the process and is due to carry out further advising of the ConDems
on IR35.
Their process is far from complete, however, it is our position
that IR35 is a reasonable set of rules and that contractors should
not be too hasty in their request for this legislation to be
removed. Why, you ask, well as the legislation both allows
freelancers to trade in a self employed style, it also ensures that
HMRC get a great tax take from the PAYE workers operating under
umbrella companies.
As a set of rules, those that govern that payment of IR35 tax
have been clearly defined over many years of court rulings. These
court cases look at factors like risk, intentions of the parties,
control, personal service and the type of mutual obligations to
determine whether the relationship represents an employment or self
employment bond between the parties.
Probably the biggest problem with the application of the
legislation is HMRC tax inspectors do not identify the key
indicators early enough in an inspection. This often means
simple tax inspections take over two years to determine, where a
more educated process would take a couple of months at most.
This is reflected in the fact that HMRC have only managed to
apply court rulings of IR35 in a handful of cases in the 10 years
of the legislation. Admittedly many contractors have needlessly
also just paid IR35 taxes following poor advice from their
accountants and legal advisors which has added to the HMRC tax
take.
With the determents of IR35 and self employment status
understood clearly by specialist freelancer accountants like Nasa
Consulting, our position to the OTS is that there should be some
further educating of tax inspectors so that they are able to make
early judgements on the application of IR35 tax rules and thereby
save the tax payer and HMRC significant resource.
One of the biggest concerns the OTS has in coming up with a
draconian tax system is driving contractors to underground and
offshore tax evasive payroll schemes. There needs to be a
balance between allowing the freelancer to operate freely according
to their self employed status and taxing those that have an
employed status. Our evidence is that more 9 out of every 10
agency workers are trading under a PAYE umbrella company or payroll
system. This allows for full tax and national insurance
deductions to be made to HMRC. The recent focus on pursuing
agencies and umbrella companies that flirt around the dispensation
and expenses regulations has only helped to increase the tax take
from temporary workers.
With the right advice it is clear to us that HMRC are getting a
good balance between generating the right levels of tax and
allowing well advised contractors the freedom to trade without
falling foul of the IR35 rules. As the OTS have indicated
that the IR35 rules have effectively increased PAYE tax take
through the proliferation of umbrella payroll companies, its seems
we may be singing from the same sheet.