Institute of Directors blasts IR35
IR35 is ineffective and has itself become a problem, the Institute of Directors concluded in a submission to the Office of Tax Simplification.
"We argue that while IR35 may have been expected to have been a solution to a specific problem when it came into force in 2000, experience has shown that it has not been an effective solution, and that it has itself become a serious problem," wrote head of taxation Richard Baron in the institute's IR35: initial submission to the Office of Tax Simplification (54kb PDF).
The IoD paper hangs back from proposing a fully specified replacement for IR35, but sets out a framework and possible building blocks for a solution.
In the past, the success of freelance campaigns against IR35 have created an impression that it's a problem for contractors and their advisers only, but the IoD's outspoken stance confirms that disenchantment with the measure has become mainstream.
Companies that take on a contractor later deemed to be employed end up in HMRC's sights for recovery of both PAYE and national insurance contributions. Indeed, engagers will often insist on personal companies in order to displace the risk.
According to the IoD, IR35's main weakness is its reliance on the employment/self-employment test. "Very often, neither HMRC nor the contractor can tell in advance what the outcome of an enquiry will be," the submission notes. As a result, many enquiries yield no extra tax or national insurance.
"The difficulty of applying the employment status tests is the key reason why IR35 has become a problem. It imposes a burden out of all proportion to its effectiveness," the paper concludes.
"Not only are contractors unduly burdened. HMRC staff are tied up doing frustrating and often unproductive work, at a time when HMRC staffing is under pressure and there are more useful things that the staff concerned could be doing. If it were possible to move away from IR35, red tape for businesses could be cut and HMRC resources could be freed up."
Rebecca Benneyworth comments
The Office of Tax Simplification has not formally invited submissions to support the report to government on IR35. Its own terms of reference in relation to this aspect of the Office's work are to:
- 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
In view of the fact that IoD has made a submission on the subject, we believe that AccountingWEB.co.uk should also contribute to the debate. Bearing in mind the above terms of reference, and the need for any proposals by the Office to be revenue neutral, please do add your experiences and comments. I'll then summarise your views for a formal report before the end of November.
In pursuit of the first objective above, might I ask members to say how much extra cost checking IR35 and completing the P35 entries if the company is affected adds to an engagement for a small contracting company (typically a one-man band contractor) - in £ and in % if you like. I'm most interested in the extra time spent even if a company is not affected.