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Contracting experts mostly reject OTS IR35 suspension option, favouring alternatives

Contracting experts mostly favour the Office of Tax Simplification’s (OTS) interim IR35 reform options of better enforcement by HMRC or the introduction of an objective ‘in-business’ test, rejecting the proposal to suspend IR35 in anticipation of its abolition.

Parasol’s Chief Executive Rob Crossland says abolishing IR35 altogether is “not a realistic proposition”, while Qdos Consulting's Tax Manager Andy Vessey sees the suspension option as “interesting, but I don’t see in the present economic climate that the Government will go for it.”

In contrast, contractor and freelancer organisation PCG favours the immediate suspension and subsequent abolition of IR35. PCG Chairman and OTS Consultative Committee member Chris Bryce has been very clear, saying in response to the OTS’s provisional recommendations: “We now call on the Chancellor to opt to suspend IR35 with the view of permanent abolition.”

In its interim report on Small Business Taxation, the OTS has published three options to reform IR35. These options are suggested as possible interim measures before structural reform of the UK tax system, to include the full or partial merging of income tax and National Insurance Contributions (NICs), makes IR35 irrelevant.

Suspending IR35 could reduce tax revenues as contractors incorporate

Vessey warns that “suspending IR35 would open up the floodgates for a tide of incorporated business and I don’t think the government can waive the income tax and NICs this would lose. When the zero rate for Corporation Tax was introduced in 2002, a vast number of our clients incorporated and a suspension would have that kind of effect.”

Crossland echoes Vessey’s warning: “Suspending IR35 would create a free-for-all. In the current economic climate, abolishing IR35 altogether is not a realistic proposition and so, for me, the first option put forward by the OTS is a non-starter.”

Bryce, however, maintains that IR35 is not fit for purpose and, if abolished: “would remove a shadow that has hung over the UK freelance community for over a decade and be a massive vote of confidence in this skilled and flexible community”.

Crossland says that contracting sector legislation, such as IR35 and the MSC legislation, has resulted in benefits to contractors, agencies and clients, not to mention the Exchequer.

“In the early days, contracting trading solutions varied hugely from agency PAYE to sole traders and limited companies, so the potential tax and compliance liabilities were huge,” he explains. “IR35 and the MSC legislation have driven up standards of compliance in the industry.”

Is greater certainty of HMRC’s IR35 enforcement viable?

PCG’s position on retaining IR35 but within a framework of much improved transparency and consistency of HMRC is unequivocal, as Bryce explains: “Keeping IR35 unchanged but with improved HMRC administration is not a valid solution to IR35 and PCG could not accept this.”

Suspending IR35 would open up the floodgates for a tide of incorporated business and I don't think the government can waive the income tax and NICs this would lose

Andy Vessey, Qdos Consulting

Vessey, on the other hand, sees the OTS’s second option as an opportunity not to be missed. “We would see closer links between the contractor adviser community and HMRC with improved guidance. Simply sharing information on contractor websites, as well as on HMRC’s, is an excellent idea.”

In Crossland’s view, it’s a case of ‘better the devil you know’, with a fresh commitment from HMRC representing the best option for contractors. “I believe that the option to retain IR35 in its existing form, but with a commitment from HMRC to improve on the legislation and correctly enforce it, represents the most beneficial alternative for contractors,” he says.

Crossland adds: “If the legislation was clear and properly enforced with a series of specific tests that then produce a balanced answer, then taxpayers, advisors and HMRC would save a lot of time, admin and expense.”

Business tests an option deserving of greater investigation

According to Vessey, the option of a business test was proposed when he and Qdos colleagues first met with the OTS. He is broadly in favour of the concept, but recognises much work would need to be done on refining the tests themselves.

“I support the idea of an objective business test, but to eliminate 90% of contractors using the current measures proposed by the OTS is ambitious,” says Vessey. “But, to be fair, the OTS has said it is open to discussion. It’s a good idea and deserving of more thought to create less restrictive criteria.”

“PCG has worked tirelessly on the ‘business tests’ as another potential way forward,” says Bryce. But the organisation doesn’t see the option as viable unless it were introduced during a period of IR35 suspension.

The Coalition Government is relying on the private sector to pull the UK economy out of recession, and those with an entrepreneurial spirit and a willingness to go it alone and create wealth are central to this

Rob Crossland, Parasol

However, on the option of introducing an objective ‘in-business’ test, contracting experts Crossland and Vessey disagree. Crossland explains: “If subtle tests and processes were introduced, there are very clever people who would find a way around these things.”

Tax simplification plays a role educating government about contracting’s benefits

Crossland fears that there is still a long way to go before the government understands how tax can be used to stimulate the private sector growth the UK economy so desperately needs.

“The Coalition Government is relying on the private sector to pull the UK economy out of recession, and those with an entrepreneurial spirit and a willingness to go it alone and create wealth are central to this,” continues Crossland. “Contractors fall well within this sector and deserve recognition as such. But from what we have seen, I’m not so sure that this is widely understood within Government.”

And although greater government recognition of contractors is a goal shared by all contracting experts, precisely how this should be best done via the tax system is still in dispute. Evidence for this comes from the PCG, whose Managing Director John Brazier says: “David Cameron ... declared war on the enemies of enterprise; suspending IR35 would be one of the clearest messages the Government could send in support of this statement.”

Published: 11 March 2011

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