IR35’s replacement will have to tread a fine line between encouraging entrepreneurial contractors and opening up loopholes to allow others to abuse the UK’s tax system. Entrepreneurs take risks to build businesses that create jobs, wealth and tax revenues for UK PLC. And, quite rightly, such people in business generally get rewarded for taking such risks through lower taxation.
But by encouraging entrepreneurs with a regime of lower taxes, this allows the less scrupulous to abuse the systems. A decade ago, such perceived abuses by contractors deemed to be disguised employees led to the introduction of IR35. And now, as the Office of Tax Simplification (OTS) considers a possible IR35 replacement as part of it's IR35 review, we will see the debate over where and how that line between encouraging entrepreneurs and discouraging abuse will fall.
There are parallels in other sections of the economy. Consider the welfare state. Clearly, social support and welfare should be available for those who need it, and easy enough for the most vulnerable in society to access. But being easy to access can mean being open to abuse, so benefit fraud will remain a significant issue. Resulting clampdowns on benefit and tightening of the rules can, as a by-product, exclude a section of that most vulnerable element of society.
In both these cases there is a line that, once crossed, results in a negative impact on UK PLC and society. Punish business people too much with punitive taxation, and they won’t take risks, leading to long-term systemic damage to the economy. Raise the bar too high for benefits, and the most vulnerable in society suffer, and you start to impact negatively on other state agencies, and society in general.
It’s surely possible, though, for the OTS review of IR35 to create a replacement that results in such a huge benefit to the economy overall that abuses of the system are vastly outweighed. My late mother user to work for a well-known high street retailer, which had an amazingly open returns policy. They adopted this policy in the full knowledge that it would be abused, but the vast majority of customers were loyal and honest and did not abuse the system. The goodwill, and the resulting repeat business, generated by this strategy vastly outweighed the costs of abuse.
The replacement of IR35 presents a fantastic opportunity to unleash the contracting workforce from the current stifling burden of legislation that could potentially generate much more benefit to UK PLC than the negative impact on tax yield as a result of abuse by the few. Strategically, many core contracting disciplines – such as engineering, oil & gas, offshore and energy, nuclear & renewables – are on the brink of periods of rapid growth. Ideally, UK PLC wants these highly skilled flexible workers to remain domiciled in the UK – paying tax and spending their disposable income on items attracting VAT that will rise in January to 20%.
A key feature of knowledge workers, like contractors and freelancers, is that they can operate from almost any location. So leaving the UK for a friendlier tax regime and more welcoming flexible working culture is very easy to do. Let’s hope the OTS creates a successor to IR35 that ensures such valuable assets continue to choose to base themselves in the UK.