I have been discussing the future of IR35 with a large group of practitioners. They expressed concern about how best to advise clients potentially affected by IR35, but a sense of injustice was also clear. How on earth do we move forward with this?
In attending a residential conference at the end of last week, I met with a number of practitioners from smaller practices in discussion groups. One of the topics consistently prompting discussion and concern was the difficulty of advising clients who “may” be affected by IR35.
No doubt brought to the surface again by Question 6 on form P35 (which I studied in detail last week) agents are consistently worried about these clients and less than confident about how best to advise them. After the Dragonfly case, many had concluded that there is no way that a small firm of accountants has the resources or technical ability to advise on IR35 status. Many considered that there is probably a significant number of businesses which would be caught by IR35 if each and every company (and indeed each and every engagement) was reviewed in the level of detail brought to bear when cases go to court. Even then, we seem to have been blown this way and that by “opinion” with at some points a bullishness about substitution clauses, and at others (like now) a real concern about this coming back to haunt their client businesses.
We discussed how the agent in these circumstances should handle advising such a client, and it was clear that most (quite sensibly) withdraw from actually advising about IR35 status, recommending that the client takes specialist advice or is led by what his own industry suggests (such as through the Professional Contractors Group). But how can any assessment of the status of a worker for IR35 possibly get at the full facts as was done in Dragonfly, given that certain statements were made by an individual at the end user client, to whom no other parties have access? Only the worker himself is likely to have spoken to such an individual and the worker is the person probably least qualified to make an objective assessment of his status.
It led me to wonder if there was any future for this much hated legislation. Although Dragonfly seems to put HMRC very much back in the driving seat, in industry wide terms the proper application of the rules seems to rely on each and every case being tested through the courts. Even this is not a solution, as each time a contractor is working in a slightly different arrangement once again the arguments will rage until the industry as a whole decides to roll over. And the words “freezes over” and “hell” might easily make a statement of similar probability. Is there any future for legislation which seems to apply to the “unlucky few”? Will the unlucky few become more common after Question 6 this year? Are the resources available to deal with a significant number of “Yes”, “No” replies? (For the confused, see this article).
The concern was also expressed that in difficult times, with tax revenues under pressure, the solution might be to devote significant resource to contractors and the IR35 question, in seeking the maximum tax take.
We wondered what the alternatives were? Some accountants who had many contracting clients were firmly of the view that full “employee based tax” was not fair for a group with no employment rights whatsoever – we thought about the poor agency workers at BMW’s Cowley plant – many working on the production line of the Mini for years, but terminated with 20 minutes notice when times got tough for the company. No rights, and indeed no respect. Most contractors are only contractors because large employers want “a flexible workforce”. This means no inconvenient rights, and the option to reduce in size in hard times without any financial consequences. Even day to day the employer is not carrying costs of holidays, sick pay, pension rights and everything else that goes with employing staff.
The success of these companies has been in part built on the skills of the contractors – many of whom have been amply rewarded for their time. Is it the place of the tax system to discriminate between workers in different positions?
My own view is that there are several ways of dealing with this, and to me the easiest is to recognise that we have more types of worker than just “employed” and “self employed”. If contracting is a significant and important aspect of the economy, then why not recognise it as a separate type of activity for all purposes, instead of trying to shoe-horn contractors into one category or the other? By separating out contractors into a category of their own, appropriate tax and NIC rules could be applied which did not rely on looking at every single case and every assignment. The rules could specify what expenses the contractor could deduct and impose whatever Government considered to be a “fair” amount of NIC on the profits. Maybe Class 4 NIC with its limited corresponding benefits could apply? Perhaps with a bar on the “free” access to pension benefits provided to the truly employed drawing a salary of LEL – in the same way as the self employed. Or maybe we could specify a minimum salary for workers – using National Minimum Wage or some other measure?
If we constructed this third category, with maybe a “five out of six” conditions test – but very simple and objective – we could increase the tax take from the contractor sector without imposing the full burden of employment taxes on them, and in addition abolish the much hated IR35 rules. A chancellor who announced that in the interest of tax simplification he would abolish IR35 would certainly get my vote.