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IR35 reform: A case of unrealistic expectations

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10th May 2012
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As a member of the IR35 Forum, Kate Cottrell had a ringside seat as the new business entity tests were devised. Here is her analysis of the latest episode in the IR35 saga.

Unlike many contractors and accountants, I do not feel deflated by the publication of the business entity tests and the guidance, as they are a starting point in a pilot exercise over the next 12 months.  At the end of this period there could be higher or lower scores for the tests or the tests could be withdrawn in their entirety. 

But I am frustrated by the emphasis many people are putting on the business entity tests as the key part of this exercise.  The tests are a minor part of the improvements to the administration of IR35, but are being blown out of all proportion by some.  Some are treating them as an IR35 status test, which of course they are not.

I did not support these tests when the PCG presented them to the OTS following their change in stance from calling for IR35 to be abolished. The suggested tests were not supported by the OTS or the government.  The PCG amended them and presented them again to HMRC via the IR35 Forum.

I still think that they add an additional layer of complexity to IR35, which is most unhelpful. But those who come out of them with low risk scores will at least have the opportunity to demonstrate their ‘in business’ characteristics so that HMRC will close their review as soon as possible. 

Chancellor said at last year’s Budget that he would keep IR35 and improve its administration. The whole process has never been an opportunity to change the law as the law has not changed! There are those who want an easy business test, but the reality is that if 95% of contractors find themselves at “low risk” of an IR35 investigation, it makes no difference whatsoever to the need for them to consider their IR35 status for each and every contract they undertake.  

This latest chapter in the IR35 story has resulted in a worse situation for contractors as inevitably any new process has to be tested and the only way it can be tested is by opening investigations.

Figures obtained from HMRC under the Freedom of Information Act showed that there have been any IR35 investigations for the past few years: 25 in 2008/09; 12 in 2009/10; and 23 in 2010/11. Many many people were able to ignore IR35 because the likelihood of being picked up was so slight.

But with the new approach, HMRC has put in place the specialist teams of approximately 36 people who will be tasked with doing looking into IR35 cases. 

A few years ago I wrote an article about IR35 reform called, “Be careful what you wish for” and it seems that this has come true!

Kate Cottrell is a founder of specialist IR35 advisers Bauer & Cottrell, who have extensive experience reviewing IR35 contracts and working practices. She is also a member of the IR35 Forum.

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By oulston
11th May 2012 14:33

IR35 and a lot of heated comments

You will have no doubt seen all the vitriol spilling onto the various forums that carry references to IR 35 Guideline announcements.

My view on this whole issue is influenced more by what is happening to the Contractor/Freelancer sector of the economy than the understandable attitude of HMRC.

In a recent report by Randstad it said: "the UK already has the greatest penetration of temporary and contract workers in the EU... and our expectation is that over time, the economy will see a gradual development of interest in the benefits of temping and contracting by both job seekers and organisations." (see SJD Accountancy site).

My own personal experience working in the building/maintenance sector suggests that increasing numbers of existing employers are allowing/shifting employees into independent status. At this rate of change it won't be that long before we have considerable numbers of seperate entities operating as Personal Service Companies registered with Companies House.

I cannot see how the Govt can maintain its current Taxation Policy with regard to what it terms disguised employment when the economic dynamics of the country determine that this is the new reality.

It may be that a new type of corporate entity has to be introduced to cater for this development but umbrella Companies are surely not the only answer to this conundrum. Its ironic that the Govt are praying for an upsurge in entrepreneurial concerns at the same time as stymying the prospect.  

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By dstickl
12th May 2012 18:29

@KateCottrell: Please support "Contractor's Age test: Is C>SPA?"

Hi Kate Cottrell!   May I politely request - when you attend the next HMRC IR35 Forum meeting - that you please ask the HMRC team members to introduce an additional / new IR35 Business Entity Test question, to those already published, of the form:

*   "Contractor's Age test - Is the contractor aged greater than State Pension Age? (999 points if yes)".

Of course, if HMRC's proposed system can only deal with two digits, then score 99 points (if yes); as, for your easy reference, I previously set out in this AWEB link:-

https://www.accountingweb.co.uk/anyanswers/question/ir35-2#comment-558692

Here are some rationales to support a  "Contractor's Age test", for consideration:

(1) IF HMRC really does support the Chancellor's Budget 2012 for growth, THEN surely it's better that people over State Pension Age (SPA) are in work, creating economic activity for the UK's economy, rather than on the street or buses, or causing extra public expenditure through pre-mature dementia/altsheimers/etc and associated NHS or care home costs.

(2) Haven't the necessary contributions needed by the state already been paid by and for such OAP workers, through the NIC records?

(3) Don't the advances in computerisation since the post WW2 introduction of the NIC scheme mean that employers can now efficiently distinguish between workers aged below and above SPA?  

(4) With the intellectual/skills capital of workers > SPA, isn't it sensible to unleash same, especially as an ageing population demands sufficient workers, and immigration is now discouraged by HMG due to the costs of congestion, etc?

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06th Jul 2015 03:33

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