What accountants say about IR35
- 85% said “IR35 creates uncertainty around contractors’ tax status”
- 78% reported that proving employment status created extra costs for clients
- 58% indicated IR35 was a major concern and the same percentage found determining clients’ employment status the most troublesome aspect of IR35
- 56% said IR35 fears have held clients back from new business
- 54% said HMRC’s IR35 guidance was not up to scratch
- 52% said abolish it and free entrepreneurs to work the way they want.
Key comments
- “My clients find it restricts their ability to trade freely and normally.”
- “It is an expensive to comply with, uncertain, subjective and should never have been passed.”
- “It's punishing the contractor instead of the engager… The risk should be with the employer and clarity provided to individuals.”
- “This is yet another ball and chain to slow down economic recovery and entrepreneurial spirit.”
- “Does not do what it was intended to so abolish it.”
- “I would like a new separate employment status for contract workers.”
- “Forget about employment status, contract reviews etc. and make close company dividends subject to NICs like salaries.”
IR35: A sledgehammer to crack a nut
Professional accountants are committed to ensuring the tax system works effectively, allowing the government to collect tax due without imposing an unnecessary burden on business.
Most of them would agree with the survey comments that “tax avoidance has to be tackled” and see the potential pitfalls when employees switch to their own incorporated companies to continue working for the same company as “disguised” employees.
As the House of Lords Personal Services Companies committee reported last [May], current tax law offers an incentive for taxpayers to arrange their financial affairs in this way to minimise the amount of tax and national insurance paid. The legislative response to this situation was IR35, named after the 1999 Budget press release that set out the measure that was enacted in Finance Bill 2000.
A fundamental problem with IR35 is that it was designed as a deterrent for those adopting a particular business arrangement rather than as an effective tax-raising measure. The financial and administrative impacts for those caught by IR35 are disproportionate to the amount of tax revenue it protects, and the measure has spawned entire industries of specialist advisers and umbrella companies to help affected contractors avoid the net.
More than half (52%) of IR35 survey respondents in September 2014 favoured abolishing IR35 to “free entrepreneurs to work the way they want”. Their view aligned with the 56% who disagreed that “IR35 has helped prevent false self-employment abuses”.
Source: AccountingWEB/FreeAgent autumn 2014 IR35 survey
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The House of Lords convened a select committee to examine the issue and the IR35 Forum established by the Chancellor to review the operation of IR35 have both issued reports in the past six months. But no action has resulted. Responding to the Lords’ suggestion to re-examine the operational integration of income tax and national insurance, the government said it would instead wait for other operational changes to the tax system to bed in.
This pause provides an opportunity to raise the matter for wider examination ahead of the 2015 general election. Given the hostility to the measure from contractors and their accountants, we think this is an appropriate time to broaden the push of IR35 up the political agenda.
Based on feedback collected from AccountingWEB’s 115,000 registered members, we have compiled this manifesto to stimulate debate about IR35 among policy makers, politicians, professional tax and accountancy bodies and contractor organisations. Our objective is to propose improvements and solutions that balance the need of contractors and their advisers for stable, fair and predictable tax treatments with policy makers’ concerns about tax avoidance.
In the words of FreeAgent founder Ed Molyneux: “We’re working around issues that are trying to solve a symptom rather than the root cause. There’s an opportunity now to set a policy that reflects how the workforce is shifting - something radical that might improve how things operate in this country.”
IR35 addresses the wrong question
Chris Jones, director of tax markets at Tolley, summarised the view of many accountants that the fundamental problem with IR35 is not the individual’s employment status, but the fact that the national insurance liability differs so greatly between those deemed employed versus those in business on their own account. Unless or until this imbalance can be dealt with, the unsatisfactory and uncertain position in which small businesses find themselves will continue, as will the difficulty of filing self-assessment returns on behalf of these businesses.
Explore IR35 abolition and reform options
A clear majority of the AccountingWEB audience - comprising 120,000 UK accountants - is in favour of reform - with outright abolition of IR35 as the preferred option among 52% of our autumn 2014 survey respondents.
“The abolition of IR35 would bring much relief, and get rid of a whole layer of bureaucracy that has led to an industry based on fear on which ‘advisers’ have made much money… I do not believe any politicians really understand how vindictive it was.”
Source: AccountingWEB/FreeAgent autumn 2014 IR35 survey comment
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Rather than stalling further examination of the options for operational reasons, we call on the next government to empower the Treasury and HMRC to conduct a proper impact assessment of abolishing IR35 and the other options suggested below.
We acknowledge, however, that there is a minority of accountants who believe in the need to curb arrangements to disguise employment relationships in order to avoid employee and employers’ national insurance. If IR35 is to be removed from the statute books, their view is that something would need to replace it. These are the best candidates we have identified to achieve this:
Option 1: Merge income tax and NICs
The Lords PSC committee report last March urged government to consider combining income tax and national insurance contributions: “Whilst we recognise the complexities in merging income tax and national insurance and the effect that this may have on the contributory principle, we recommend that the government re-examine the longer term case for combining taxes on income and national insurance.”
We endorse the call for an “earnings tax” unifying income tax and NICs. If current tax rates were retained and the levies merged, basic-rate taxpayers would end up paying 32% of their earnings and higher-rate taxpayers returning 52%. Employers’ NI contributions are likely to remain unchanged under the plan. Fifteen per cent of the autumn 2014 IR35 survey respondents supported this option.
Option 2: Clarify employment status through legislation
A recurring comment from accountants when discussing IR35 is that it unfairly shifts the tax liability and administrative burden from the employing organisation on to the worker. This inequity could be addressed with legislation that set out clear criteria for employment and shifted the risk back on to the employer: 12% of our survey respondents favoured this option.
As with the idea to merge income tax and national insurance, the Office of Tax Simplification has already examined this idea and came up with a suggested “statutory employment test” in its review of employment status. One development that would clarify employment and tax status in this way is the freelance limited company structure proposed by IPSE in November 2014. This would be similar to ‘S Corporations’ in the USA, where all income is passed through like a partnership to the personal tax return.
Option 3: Impose NICs on close company dividends
This simple expedient was proposed by AccountingWEB member Eyrie, who argued “The simplest solution would be to treat dividends from a close company as a deemed salary subject to income tax and NIC, rather than the lower tax rate applicable to dividends, and have this deemed salary deductible for CT.”
Message to HMRC: Improve IR35 guidance
More than half (54%) of the AccountingWEB IR35 survey respondents said HMRC’s IR35 guidance was not up to scratch. Whatever happens in the field of freelance employment status and taxation during the next year, the quality of information available to both accountants and those affected by IR35 must be improved. On behalf of Qdos consulting, Seb Maley suggested creating an employment status indicator that applied to people working under contracts.
Sadly, this is one of many areas where the quality of existing guidance has suffered when it was migrated from HMRC’s website to Gov.uk. Now that the IR35 Forum has completed its review, perhaps its focus could shift to assisting HMRC to improve its guidance.
What are your views on the options presented? Since the wider community is somewhat divided on the issue, our manifesto does not demand a specific change, but seeks to build a coalition around the idea of constructive reform. What points would you want the policy makers to address? The more people who contribute to this debate, the better.