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Contractors may benefit from OTS employment status review, which could affect IR35

Contractors may benefit from the findings of a new review of employment status by the Office of Tax Simplification (OTS) that could streamline the currently complex process of determining employment status. The review might even affect the IR35 tax legislation.

According to the OTS, the review is designed “to examine the dividing line between employment and self-employment and whether it is drawn in the right place and in the right way”.

Although the review outline specifically states that IR35 will not be considered, as the OTS looked into the contractor tax in 2011, ContractorCalculator CEO Dave Chaplin believes that if the rules determining employment status are changed, then IR35 will be affected.

“If the OTS recommends changes to the tests of employment that are accepted by the government, and the dividing line between employment and self-employment changes, then the legislation underpinning IR35 will have to be updated,” he says.

In their initial letter to the Exchequer Secretary to the Treasury David Gauke, OTS chairman Michael Jack and tax director John Whiting said that the review has been motivated by the fact that “the boundary between employment and self-employment has not kept pace with changing work patterns”.

The letter continues: “The growth of freelancing as a way of conducting business had led some to suggest this is a ‘third way’ between employment and self employment.”

The OTS also notes that: “It is important for the tax system to fit with the real world, but in many instances case law is complex and difficult to apply, for large and small businesses alike. Offering more certainty to individuals and businesses would be a useful simplification.”

The intention is to publish the findings in time for any recommendations that the government accepts to be incorporated into the 2015 Budget.

“Determining employment status for tax purposes is currently a complex process requiring expert knowledge of employment legislation and case law,” highlights Chaplin. Contractors typically have to rely on legal specialists or on ContractorCalculator’s free online IR35 test.

“If the OTS were to streamline the process and specifically acknowledge the so-called ‘third way’ of contracting and freelancing, then contractors would benefit.”

Contractors will have the opportunity to contribute to the review as, according to the OTS: “The Office’s work will be informed by consultation with interested parties, including forming and working with a consultative committee.” However, details of how to contribute have not yet been released.

Published: 31 July 2014

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