Chancellor George Osborne’s decision to retain IR35 and administer it better probably came as no surprise to most contractors, especially regular readers of ContractorCalculator. In fact, we predicted that exact scenario in this blog back in January, stating that: “IR35 is here to stay until fundamental tax issues are addressed to make it redundant.” And that’s exactly what came to pass.
But whilst it would be nice to take the credit for being so smart, in truth Osborne’s decision should not have come as a surprise. Had he abolished IR35, it would have opened the flood gates for so-called ‘Friday-to-Monday workers’ and ‘perm-tractors’ to pretend to be something they are not – contractors – and save huge amounts of income tax and National Insurance Contributions (NICs) in the process. It is true that we don’t know how big that exodus may have been, but to get an idea of the likely rush, witness the flight of contractors from managed services companies (MSCs) into offshore Employee Benefit Trusts (EBTs) and umbrella companies when the MSC legislation was introduced.
And take, too, the Office of Tax Simplification’s (OTS) review of IR35 in its Small Business Taxation interim report. In it, OTS offered three scenarios as IR35 alternatives and concluded that not enough information was available to decide on abolition. So, abolition was never going to happen in this Budget. The choices OTS made available to the Chancellor were either to administer IR35 better; gather more data to consider abolition; or introduce ‘in-business’ tests. And, as our IR35 Solutions white paper showed, the latter simply couldn’t be applied to contractors.
Even HMRC has admitted that it has not enforced IR35 terribly well. And ContractorCalculator’s freedom of information request following the MBF Design case showed that HMRC simply didn’t record the data required to assess the effectiveness of IR35 as a revenue-generating tool, let alone HMRC’s track record of enforcement. In fact, our sources say the number of active cases has fallen away dramatically in the last 18 months as inspectors focus on relatively easy targets in the construction sector.
There is no chance now that IR35 will be repealed unless it becomes irrelevant because income tax and NICs merge. This has become a possibility following the Budget, something else we predicted in our IR35 Solutions white paper. And that’s something we should be grateful for; consider the draconian business tests implemented in Australia. Would any contractor really want them to be introduced here?
We should, of course, read the term “better administration” as “better enforcement“ of IR35. And whilst some might be wary, this could actually be a great benefit to genuine contractors. HMRC has tried fighting cases in the huge ‘grey area’ between contracting and employment and has generally lost, often at great expense to the taxpayer. But there are plenty of sitting ducks out there – the Friday-to-Monday mob and the perm-tractors – which are exactly the kinds of disguised employees IR35 was originally conceived to target and who should be easy enough to find.
And what about for the rest of us, the genuine contractors and freelancers in business in our own account? Well, it generally costs less than a day’s fees to pay for an IR35 expert to review a contract for IR35 status and establish a confirmation of arrangements. And it costs nothing to use ContractorCalculator’s free Online IR35 test. Should you not pass, then think about getting help.
So, if you are a genuine contractor, make a small investment to establish your IR35 status and take the necessary steps to stay outside IR35 – it really isn’t difficult to do.
And remember that IR35 is here to stay; and you read it first on ContractorCalculator.