IR35 is being abolished. Oh no it isn’t! Oh yes it is! But if its demise is imminent, why has HMRC just updated its Employment Status Manual to include key new case law, potentially widening the net to catch even more contractors within IR35? And why are we being told HMRC lacks the resources to police IR35, as all efforts are on construction? As if construction did not have enough troubles as it is…
For the avoidance of doubt, let’s look again at what has been promised by the new coalition government in its Programme for Government: “We will review IR35, as part of a wholesale review of all small business taxation, and seek to replace it with simpler measures that prevent tax avoidance but do not place undue administrative burdens or uncertainty on the self-employed, or restrict labour market ?exibility.”
Whilst “seek to replace” is not a cast-iron guarantee that IR35 will be replaced, let’s assume that IR35 as it stands is clearly not long for this world. That’s the easy bit.
The tough bit is what constitutes “simpler measures that prevent tax avoidance”? That’s why, as we’ve warned in previous blogs, contractors should be careful what they wish for in case the new option is worse than the current one. What we should all be wary of is what new “simpler measures” might be. After all, they are likely to form a new definition of who should be taxed as an employee, and who should pay tax as a genuine contractor working through their own limited company.
Clearly, the “simpler measures” need to be fair; after all, that’s what anti-IR35 campaigners have been battling for. What we currently have in IR35 is inherently unfair – a tax law that is, to an extent, self-policed and can result in a decrease in net earnings of typically 25%. But the alternative of just saying that if you don’t have an employment contract you don’t get taxed like an employee is also unfair.
There’s no escaping the fact that unscrupulous clients and agencies force many workers into limited companies simply to evade the responsibilities, and high costs, of employment. The flip side is that too many contractors want the high net pay that having a contract for services (and not for employment) brings, but then get upset when they are treated like a service provider and not an employee. The pages of our Contractor Doctor section are full of examples of these. Read the large print, we say: contractors don’t have employment rights, because they’re, erm, contractors!
As the new government begins its review of IR35, it is to be hoped that it will learn the lessons of the ill-thought-out introduction of IR35 and the decade of uncertainty and unfairness that followed. There is the lesson of not implementing poorly thought-through and incomplete legislation. And then there is the lesson of ten years of case law, including the content of HMRC’s Employment Status Manuals, which demonstrates just how difficult it is to definitively draw a line between employee and contractor.
IR35 continues to be a moving feast. So let’s hope that when the bill arrives, contractors aren’t the ones left to pick up the tab.