IR35: A year of testing tests looms

by Calum Fuller

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11 May 2012

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IR35

IT WAS HOPED that when HM Revenue & Customs released guidelines on when contractors' tax rules should be applied, that the issue could be laid to rest and we would all know where we stand on the status of workers.

Alas, it was not to be, and despite HMRC's efforts to provide guidelines on IR35 this week, many parties' concerns remain unsatisfied.

Many - including small business representatives invited by the Treasury forum to discuss the issue - have expressed concerns that the 12 tests (replete with scoring system) and illustrative scenarios put forward by HMRC simply do not go far enough and do little to clarify the grey areas.

In their defense, HMRC has made it plain that these tests and scenarios were being piloted over the next 12 months, emphasising they are "not set in stone" and that they are subject to change "in response to feedback and business changes" in order to "remain relevant and helpful".

In spite of that promise of pragmatism, many are unconvinced. Small business representatives invited by the Treasury forum to discuss the issue - including the PCG, Recruitment and Employment Confederation (REC), Freelancer & Contractor Services Association (FCSA), Federation of Small Businesses (FSB) and Association of Professional Staffing Companies (ASPCo) - said HMRC "had missed an opportunity to bring clarity, transparency and fairness in dealing with IR35".

It should be remembered that the Office of Tax Simplification (OTS) recommended that IR35 be suspended in a report a year ago, which the government rejected in favour of improving the Revenue and fine-tuning the legislation. Last year those captured under IR35 saw the taxman gain the princely sum of £200,000.

For its part, HMRC says it cannot go any further given the complexity of the issues involved, though it will make any necessary changes following the trial and the feedback it receives. The criticism, though, is showing no signs of abating, and for many binning it and starting again looks like the most appealing option.

Be that as it may, the main bugbear appears to be the legislation itself. Indeed, ICAS's director of tax, Derek Allen, is particularly scathing and does not hold out much hope for the latest guidance.

"It's akin to attempting to deal with a very serious gaping wound with a sticking plaster", he says.

For Allen, IR35 is a flawed legislation and once it was obvious it was not going to achieve what it set out to do, it should have been repealed.

"The new guidance will not solve the fundamental problems associated with IR35", he adds.

Those problems do not appear to have gone away. IR35 legislation is designed to prevent people who use intermediary companies to sell their services from being better off than if their clients employed them directly.

Yet, as last week's news that 2,000 senior public staff had been working in an off-staff capacity shows us, it does not appear to be effective.

As far as accountants and tax advisors are concerned, the main issues remain unaddressed. They believe the legislation is still costly to adhere to, while easily circumvented if there is intent to transgress it.

According to John Whiting, who represents both the CIoT and OTS, it is an issue that needed addressing regardless of the controversy surrounding it due to the amount of time, effort and worry it occupies for freelancers, contractors, advisers and the taxman.

He concedes, too, that he is uncomfortable with the lack of precision in both the legislation and the guidance, but is keen to "give it a try" to "see how it operates" before an evaluation in 12 months' time.

After all, the guidelines are little more than 48 hours old and as-yet untested. We will know far more in a year.

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