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ContractorCalculator Whitepaper: IR35 - Better administration or enforcement?

London, Thursday 1st September 2011 – The “better administration” of IR35 promised to contractors by Chancellor George Osborne can in practice only mean “better enforcement”. And that, in turn, will result in an even greater focus on the contracting sector by an HMRC under pressure to increase tax revenues. Those are among the conclusions of a new white paper by Dave Chaplin, chief executive of ContractorCalculator, the leading independent website for the UK contracting sector, and author of The Contractors’ Handbook.

IR35: Better administration or enforcement? explores the motivation behind the Chancellor’s call for IR35’s better administration, and examines how contractors might be segmented according to IR35 risk. It discounts ‘in-business tests’ as an unworkable solution and asks how better administration can be measured, particularly in light of HMRC admitting it has virtually no relevant historical data on which it can base comparisons.

According to Chaplin, the white paper offers the IR35 Forum insights into contracting’s requirements for fairer and more consistent application of IR35 as the new body deliberates on IR35. “Better administration of IR35 can only mean better enforcement, potentially putting contractors’ tax affairs under the same sort of spotlight as they were under when IR35 was first introduced,” says Chaplin.

The changes to how IR35 is administered are being deliberated right now by the IR35 Forum and, based on the minutes of the Forum's meetings, change is being driven almost entirely by HMRC

Dave Chaplin, ContractorCalculator

“The tax law has not been repealed, so the only changes we can expect to see are to HMRC’s processes of enforcement,” he continues. “The changes to how IR35 is administered are being deliberated right now by the IR35 Forum and, based on the minutes of the Forum’s meetings, change is being driven almost entirely by HMRC.”

The white paper highlights how the ‘in-business’ or ‘gateway’ tests’ being presented to the IR35 Forum are not a solution that would benefit contractors. “Adding a new set of tests to the existing tests of employment, which are already hugely complex, will not benefit contractors,” says Chaplin. “We’ve already seen similar tests fail in Australia. If a simple set of ‘in-business’ tests could be made to work, wouldn’t it already be in place?”

Chaplin suggests that better enforcement of IR35 may actually be in the contracting sector’s interests: “The objectives of contractors, HMRC and the Treasury may not be so different. Contractors want fairness and certainty, and so does the Chancellor in terms of tax yields. Consistent application of IR35 by experts at HMRC to target disguised employees would leave genuine contractors with nothing to fear.”

Chaplin concludes: “IR35 will not be abolished and it is likely to remain in place until root and branch reform of the UK tax system renders it irrelevant. Better enforcement might be the best we can hope for. And if, through the work of the IR35 Forum, it becomes the right sort of better enforcement, then contractors can look forward to fairer and clearer application of IR35, with HMRC only targeting disguised employees, not genuine contractors.”

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Published: 31 August 2011

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