IR35 Factors, IR35 Compliance, are you caught?

Kate Cottrell of IR35 specialists Bauer & Cottrell takes a look at the terms of reference for the long awaited review of IR35.

IR35 - where are we now?

As at 16th August 2010 the truth is that no one knows what the future for IR35 is and this has been confirmed by John Whiting the head of the new Office of Tax Simplification (OTS).

Indeed Mr Whiting goes as far as saying that his report to Government ahead of next years budget may say little more than we need to look at the whole issue of the UK's temporary workforce.

Since the election we have seen numerous announcements from interested parties. Over the last few months the victorious claims of IR35 being abolished have changed to IR35 being reviewed with a view to replacement.

Some are speculating on what will replace IR35, some are claiming to be influencing the outcome by engaging with all the important people tasked with this review and interestingly many of those individuals actually affected by IR35 are beginning to question whether or not IR35 is such a bad thing.

What are the facts?

The only facts we have is the terms of reference published by HM Treasury on the OTS's review of the IR35 legislation.

"Therefore, in its initial report to the Chancellor, the Office should also:

• identify and provide evidence of the complexity and uncertainty created by IR35;


• consider alternative legislative approaches that would be simpler and create certainty while ensuring that, where intermediaries are used to disguise employment, any income that is effectively employment income is taxed fairly; and


• consider the scope for tax avoidance and the extent to which alternatives to IR35 would affect it.

The focus of this work should be exploring alternatives to IR35. However, the Government will be interested in issues in relation to the structure of the tax system and the employment status test more generally. This may have a bearing on wider issues about employment status and the boundary between employment and self-employment, including the impact on larger businesses."

In a nutshell, we have a call for evidence - an acknowledgment that intermediaries are being used to disguise employment and the point that there could be scope for tax avoidance in any alternatives to IR35 proposed.

The final paragraph puts the review of IR35 into context with the intention to simplify the entire tax system and requires a look at the boundaries between employment and self-employment and how large business will be affected by any change to the current system.

IR35 will not be reviewed in isolation

It is to be welcomed that the review of IR35 will not be piecemeal tinkering with the system.

The review is part of a whole scale review of the entire tax system taking account of Government's commitment to maintaining labour market flexibility and putting in place a fair and efficient tax system that takes account of any impact upon businesses both large and small.

IR35 already underpins other legislation such as the Managed Service Company rules and the forthcoming Agency Workers Directive, so it has never been possible simply to abolish it in isolation.

We also have the Umbrella Company sector offering a viable, flexible way of working which arguably would not exist in such numbers were it not for IR35.

Where to start

In order to consider an IR35 alternative it is necessary to investigate and define the flexible labour market.

It is not possible to simply label every temporary worker as a "Freelancer" or a "Contractor", a "Consultant", etc.

The one size fits all approach does not work. It will be necessary to deal with the agency temp effectively forced to work through an intermediary through to the highly skilled worker genuinely in business.

The one thing that most temporary workers have in common is that they applied for a job often through an agency as an individual irrespective of the presence of their own limited company or umbrella or any other structure.

Account will also have to be taken of the rights to state benefits that temporary workers are entitled to in line with National Insurance rules and to other benefits in line with the Agency Workers Directive and perhaps most importantly any rights to the protection of employment law which is perhaps the biggest fear of large businesses.

It is only once the status of the different types of worker has been defined that you can begin to tackle disguised employment and tax avoidance with a view to maintaining a flexible workforce.

All the parties in the contractual chain need certainty and fairness not just the worker.

Result - Revenue Neutral

The Government has stated that one of the general principles for recommendations resulting from the review of IR35 is that it should aim to be "broadly revenue neutral".

This will be the most challenging aspect of the whole exercise.

If the IR35 review does entail looking at the tax system, the benefit system and employment status/law in general, in an effort to have a simple and fair system, then perhaps it should also encompass a look at the rights of other workers such as those on agency payrolls.

Is it fair that the PAYE agency worker cannot claim travel expenses?

In the world of contracting, is the head office of the umbrella company or the home address of a personal service company director really his/her permanent workplace?

As with any review there are often more questions raised than answers provided and I wish the OTS well with this enormous task and look forward to contributing.

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