The Intermediaries Legislation (IR35) discussion document published by HMRC in the wake of the Summer Budget 2015 shows quite how far the Treasury, Chancellor George Osborne and the taxman are from understanding the reality of this fiendishly complex tax legislation.
Somehow someone in HMRC or the Treasury has decided that IR35 should be raising an additional £430m, and rashly promised that sum to the Chancellor. Where that sum comes from is anybody’s guess, but we know from experience that HMRC’s reasoning when making these estimates is usually deeply flawed.
Furthermore, in its discussion document, HMRC demonstrates quite clearly that it has not got a clue about how to raise this additional tax, even if it were remotely possible. In fact, the taxman can’t even properly calculate and compare how much tax an employee generates versus a contractor.
Several options are suggested by HMRC. It talks about better administration and compliance. But wasn’t that what we had in May 2012? And didn’t the flagship feature of that initiative, the Business Entity Tests, get abolished in April 2015? In fact, the dismal results generated by the new specialist IR35 compliance teams set up in 2012 ended up costing the taxpayer more than the tax they generated.
HMRC acknowledges that IR35 is complex, and so another option it has suggested is to apply the tests used in related disguised employment/false self-employment legislation – supervision, direction and control (SDC).
However, as the implementation of the Onshore Employment Intermediaries (False Self-Employment) legislation is showing, SDC is even more complicated than control, substitution and mutuality of obligation to determine.
So, it seems the idea is if IR35 is not generating enough money because it is too complex for most tax inspectors, let alone taxpayers, to understand, wouldn’t it be a good idea to make it even more complicated?
Where HMRC has been quite clever is to include an option that puts clients in the frame for IR35 compliance. The upshot of this option is that the taxman suddenly has access to all of the expert and expensive tax advisers on the payroll of big business.
They will be tasked by their corporate clients to lobby ( = indirectly advise) HMRC on much more effective ways to enforce IR35 that does not involve their clients doing it. These will no doubt come in the form of submissions to HMRC.
And in the meantime, HMRC is spreading its usual mis- and disinformation, filling no one with confidence when it can’t even calculate tax properly.
The case studies included in the discussion document completely ignore the facts that contractors earn much more than their permanent counterparts and that most contractors are also collecting VAT. When calculated on a realistic basis, the total tax paid by an employee and a contractor are in fact very similar.
Finally, you have to ask why bother attacking contractors after April 2016 anyway? The new Dividend Tax is forecast to generate about £6bn in extra revenue, and for a change there is a reasonably sensible basis for this estimate. The tax differential between employees and limited company contractors will shrink considerably. Plus Dividend Tax is so much easier to collect than IR35.
It is important that contractors and other contracting stakeholders respond to the discussion document. We can live in hope that if enough of us tell HMRC, and indirectly George Osborne and the Treasury, how the world of contracting and IR35 really works they will take notice.
But for now, until the end of September, let’s let the taxman and the Chancellor enjoy their sojourn into tax fantasy land – it is the holiday season, after all.