IR35 - A History
There’s been a lot of talk around the watercooler recently regarding new employment rules that are about to be introduced by the government that could leave nearly 200,000 self-employed workers paying thousands of pounds extra in tax each year. Not only that, but word on the payroll street is that they’ll have a pay cut too. Double whammy!
Well the hot goss this time is scalding, because this is not some story to frighten young lads who have just joined their father’s companies after uni, no this is actually happening. From April 2020, the government is set to expand the off-payroll working rules, which are known as IR35, to the private sector. But what’s an IR35? What is off-payroll working? And what happened to the Twix I left in the staff room fridge?
Gather round the fireside children to hear a tale of greed and trickery. Yes, of course I’m talking about the HMRC. Just kidding, for once it’s the other way around. It all started with those pesky Personal Service Companies (PSCs) who, at the time, were paying less tax and NICs than those who were employed directly. In retaliation, the HMRC introduced off-payroll working rules (IR35) back in 2000 which ensured that anyone who worked through a PSC and would have been employees if directly engaged, would pay roughly the same income tax and NICs as if they were employers.
Why the fuss? Well at the time there was seen to be a large number of tax and NIC avoidance schemes through the use of intermediaries - in this case, partnerships, PSCs and limited companies. This was actually a big problem because, due to the lax tax loophole, employees were able to convert their status to that of a limited company or PSC quickly and very easily. Funnily enough, HMRC were not a big fan of this as it meant that when these employees became “contractors”, they managed to significantly decrease how much tax they paid and thus increase their take home pay by tenfold.
YUP! I mean, it’s kind of impressive (if not morally vacuous). In the words of Mr Krabbs “money money money money”. But the HMRC were having exactly none of it. No ma’am. Something needed to be done about these tax-dodgers ASAP and this is how the “Intermediaries Relationship” (or IR35) came to be. It was essentially a way of the Treasury negating the status of “contractors” in the eyes of the law and changing it back to “employees” who were subject to the same rules and regulations as the rest of us.
So really, in essence, IR35 means well and is designed to create fairness and equality amongst us taxpayers. So those moaning about losing money were making it unfairly, right? Well, no - despite its good intent, IR35 has been embroiled in drama, with most people criticising it as a badly thought out system that was too hastily put forth.
Although there have been attempts to reform it, none have been successful and the negative opinion prevails. Back in 2010, in at attempt to make things more simple for small businesses the ‘Office of Tax Simplification’ (or OTS) came into effect but didn’t really do much. But since then, the public sector were the only ones to benefit from some changes made in April of 2017. That was until now...
Yes, that’s right folks - the off-payroll rules are being overhauled and reformed! About bloody time! And this time the focus is on the private sector. Why are people still worried then? Should they be? Will I ever find that Twix? Find out who, what, where and why in my next blog.