The Institute of Directors has had its say, now it's our turn. Rebecca Benneyworth offers the Office of Tax Simplification some suggestions on how to reform the small company taxation regime. What points would you like to raise?
The Office of Tax Simplification has made a review of IR35 one of the key planks of the review of small business tax; indeed the review of IR35 was identified as part of the review of small business taxation by the Treasury when the office was first set up.
In setting up the OTS, the government indicated that it would seek to replace it with simpler measures intended to prevent tax avoidance, but which do not place undue administrative burdens or uncertainty on the self employed or restrict labour market flexibility. The task the office must set about in reporting on IR35 has also been specified by HM Treasury:
- identify and provide evidence of the complexity and uncertainty created by IR35
- consider alternative legislative approaches that would be simpler and create certainty while ensuring that, where intermediaries are used to disguise employment, any income that is effectively employment income is taxed fairly; and
- consider the scope for tax avoidance and the extent to which alternatives to IR35 would affect it.
The focus of this work should be exploring alternatives to IR35. However, the government will be interested in issues in relation to the structure of the tax system and the employment status test more generally. This may have a bearing on wider issues about employment status and the boundary between employment and self-employment, including the impact on larger businesses.
Responses so far seem to indicate that uncertainty is the real issue with IR35. That practitioners and clients alike cannot decide whether they are genuinely “caught” by IR35; they do all they can and then have to leave it to the fates – which is an unsatisfactory solution for businesses.
Complexity (for the adviser) is not the real issue in dealing with the fall out from IR35, but most are not experts in employment status, and even then the courts seem to manage to come up with new angles almost every time. I would go further – in view of recent decisions by the courts, most contractors working through an agency cannot correctly determine their IR35 status without sight of the agency contract with the engager, which they do not have access to. So ultimately the courts have made the legislation practically unviable.
Coming up with alternatives is a difficult task, as my article of about 18 months ago shows. So maybe rather than viewing the task as re-engineering small business tax as a whole (indeed we have had some recent suggestions along those lines), maybe we can focus on a solution designed to meet the specific issues addressed by IR35.
Let us know what you think. I’m looking to prepare a formal report before the end of this month.