During the last decade, since IR35 was introduced, contractors and HMRC have been waging a bitter cold war of escalation.
As HMRC developed a new tactic to catch more contractors inside IR35, so contractors and the contracting service sector developed a solution. Then a tax specialist might create a new approach putting contractors ahead of the game, closely followed by the taxman’s carefully crafted counter move. Soon there followed more tax laws, like the Managed Services Companies (MSC) legislation, or fresh guidance on how case law should be applied. Now, after ten hard years, the cold war has left many contractors inhabiting an uncomfortable no-man’s-land, trapped and under fire by HMRC’s big guns.
I liken this to a story from Hitchhiker’s Guide to the Galaxy. Author Douglas Adams described the ‘electronic thumb’, which his anti-hero, Ford Prefect, used to hitch a ride on the Vogon ship about to demolish the Earth. The Hitchhiker’s Guide explained that half the galaxy’s most talented engineers and scientists devoted their time to creating an even better ‘thumb’, while the other half of the galaxy’s finest minds devoted their time to thinking of ways to cancel the thumb’s effects!
But despite the awesome talents of the big brains at the Treasury and HMRC, plus those at tax, accountancy and legal practices, the real problem is that, in IR35 and the tests of employment law used to enforce IR35, we have legislation so complex that only employment law experts and judges can ever possibly hope to understand it. Like the ‘thumb’, it’s a powerful tool, but no one who uses it really understands how it works, or trusts that it will work in the same way next time it is used.
Now the IR35 cold war is thawing. The coalition government has asked both sides to lay down their arms and negotiate a successor to IR35, presided over by the peacekeeping force that is the Office of Tax Simplification (OTS). But there remain ongoing skirmishes and HMRC’s big guns are still targeting battle-weary contractors who have let their IR35 guard slip. And neither side should assume that the best possible solution will come out of the current negotiations.
So, what sort of ‘treaty’ would ensure a just and satisfactory end for all combatants, and one that would not spark off a whole new arms race?
Well, any new tax treaty between HMRC and the flexible workforce must be simple, objective and unambiguous. IR35’s replacement has to be clearly understood by the contractors it affects and the accountants, lawyers and contract specialists who advise them. It should no longer be necessary for judges and employment law ‘experts’ to intervene with decisions and opinions over what ought to be a straightforward, day-to-day process.
And the new rules should ensure there can be no return to the arms race. The taxman should be able to clearly identify ‘disguised employees’ who are not true contractors. And contractors must have certainty in their tax affairs, so no more tax casualties are left stranded and vulnerable in no-man’s-land.