IR35: where is this going ?

March 02, 2012 2012

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We normally try to steer clear of subjects that are covered by every man and his dog but IR35 is a subject that is not going to go away so we thought we should throw our 'tuppence worth' into the hat given that it is such a topical issue just now.

Most readers will surely have seen all the hoo hah in the press in recent weeks around public departments paying senior staff through their own limited companies in order to (illegally) avoid PAYE and NI (amongst other advantages). It all kicked off with the Student Loans Company (a Government quango), then the Department of Health was 'outed' and lo and behold, even HMRC have been found to be 'at it'.

Most of the headlines around this have been screaming about "IR35 avoidance" or whatever. However, technically speaking, most if not all of the above cases may have nothing whatsoever to do with IR35 - for the simple reason that these posts are Offices of Employment and automatically fall within PAYE and NI legislation anyway and so the use of a limited company, and IR35 legislation, is mostly a red herring. However, what it has highlighted, is that the issue of PAYE and NI being avoided through "disguised employments" is a huge issue across the country both in the public and the private sectors. Some of this is done legally (although you have to question whether it is right morally) by taking advantage of the vague legislation that is IR35, whereas others, such as the ones we mention above, are illegal in that they clearly go against tax law and have no technical basis whatsoever.

There has been much debate over many years on how and if IR35 legislation can be improved to reduce or remove the current uncertainty and unfair advantages around the use of Personal Service Companies. Whilst the recent public sector 'errors' are nothing new, in that the private sector has been doing this type of thing (legally and illegally) for years, it has infuriated Joe Public that well paid senior civil servants are "dodging" tax so blatantly and there is now an even greater pressure on HMRC and the wider Government to fix this issue once and for all.

So, are we really going to see any changes coming through as a result of this and, if so, what might change ?

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Well, the current focus of the IR35 Forum, set up some time ago by HMRC, has been two fold: 1) to refocus HMRC efforts on high risk cases and 2) to tighten up the tests to make it clearer whether a worker is inside or outside of IR35. It appears that good ground has been covered by the Forum in the last year or so and HMRC did announce a few months ago that new procedures will probably be introduced this April around this.

The Office of Tax Simplification has also been making noises about an overhaul of the legislation in this area, some of which is linked to a more ambitious proposal to completely align NI with tax which may be some years off yet.

But is this going to be enough ? We don't think so !  Making a few tweaks here and there is never going to make much of a difference in our opinion and as long as it is still a possibility that PAYE and NI can be avoided by manipulating contracts or working arrangements, many workers and employers will continue to do so as the rewards can be significant. No, we believe that a more radical approach is needed to sort the issue once and for all, e.g. removing ALL tax and NI advantages or differences between the employed or self employed and/or a complete overhaul of the IR35 'tests' to make it impossible for ALL one man band companies to avoid PAYE and NI on earnings that they are effectively generating as an individual.

Whether HMRC and the Government can make this happen soon is the big question mark but we do believe that there is a growing realisation that a major change is not only needed but is also being demanded by the public and so there is a reasonable chance that more fundamental proposals may be tabled over the months ahead, even possibly as early as the Budget in a few weeks time, as a taster in getting this thorny issue finally nipped in the bud. And not before time we say !

As to the finer detail of how this will be achieved, we just do not know at the moment. As with most things to do with tax law though, a significant change in legislation is not easy to do and so there will undoubtedly be tears and tantrums from many along the way before we see light at the end of the tunnel.

There will be LOTS more to come on IR35 over the next while so we will, as always, keep you posted.



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