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Tax rules are failing contractors, the OTS’s John Whiting tells ContractorCalculator

Tax rules have not kept pace with modern ways of working and are failing contractors, says Office of Tax Simplification (OTS) Tax Director John Whiting in this exclusive interview with ContractorCalculator.

“Contractors and freelancers are in a halfway house between employees and self-employed tradespeople and professionals,” says Whiting. Responding to the proposal in the recent ContractorCalculator IR35 white paper that tax legislation has not kept pace with the growth of the modern knowledge-based flexible workforce, he says: “It’s a very valid point.”

Whiting adds. “Pay As You Earn (PAYE) is a classic example. It is a system created when everyone worked full time, being paid cash for many years. It still works very well for such employees, but not for those with variable work patterns and, as a result, is starting to creak at the seams.”

Final reliefs report and interim small business review, including IR35, imminent

Whiting confirms that the final report on the OTS Tax Reliefs Review is due to be published by 7th March and the interim report on the Small Business Tax Simplification Review, which most contractors are eagerly awaiting because it will contain the OTS’s findings on IR35, will be by 14th March, both in time for the Budget.

“There will be a period of consultation following the publication of the interim report on Small Business Tax Simplification,” explains Whiting. “The final report in June will include our recommendations to Ministers. Subsequent proposals for any significant changes will undergo proper consultation.”

Whiting would not be drawn on what the interim report might say about IR35, but he did confirm that it has received considerable attention: “When everybody is telling us that IR35 is a burden, our task has been to dig down to find out why.”

Office charged with changing system told, ‘Stop changing the system’

The information gathering, research and consultation processes for the IR35 review have been considerable, but so have the inputs from stakeholders. Whiting explains: “We have been overwhelmed and delighted by both the volume and quality of responses and how much people care about the simplification process.”

Whiting continues: “Top of the ‘hit parade’ of what stakeholders are demanding for the small business taxation system is for government to stop changing the system!”

There have been few surprises as OTS’s information gathering work has proceeded, but Whiting was not expecting many: “We have been looking for amplification of the issues that have been raised and to identify quick wins and small measures for improvement.”

Could root and branch reform of taxation ‘solve’ IR35?

Is the solution to IR35 root and branch reform of the overall tax system that will then render it effectively irrelevant? Although such weighty issues are beyond the current remit of the OTS, its team has been seeking views on issues such as National Insurance Contributions (NICs). These, Whiting acknowledges, are a key factor in the debate over IR35.

“National Insurance is a constant issue, and is clearly what drives the behaviour that IR35 is there to police,” explains Whiting. “The resulting enforcement by HMRC is driven by people trying to avoid National Insurance.”

We can't solve IR35 until you solve the whole tax system

John Whiting, Office of Tax Simplification

So is IR35 here to stay until wholesale reform occurs? Whiting responds carefully, and with heavy emphasis: “We can’t ‘solve’ IR35 until you ‘solve’ the whole tax system.” This, he acknowledges, is not possible all in one go.

Are contractors now a distinct subset of the small business population?

Contractors using trading vehicles such as limited companies are no different in the eyes of company law from any other small businesses trading as limited companies, but has the contractor community grown sufficiently and evolved distinguishing features that merit special attention in the OTS small business review?

“ContractorCalculator readers are not alone in identifying contractors’ special interest – many trade bodies have done the same,” says Whiting. “We will certainly be saying something about contractors in the review!”

Whiting concludes: “Although I expect contractors will want to dive straight to the IR35 section of the interim review first, what we have considered and will be writing up covers all areas of small business taxation that will benefit from simplification. We’re therefore hopeful that ContractorCalculator’s readers will be interested in the whole review.”

Published: 27 February 2011

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