IR35 Factors, IR35 Compliance, are you caught?

The contracting industry has reacted with both joy and caution at the news that the new coalition government has announced its plans to implement an IR35 review.

In its announcement, the government said it aimed to review the tax rules as part of a "wholesale review of all small business taxation". IR35 would then be replaced with new measures that "prevent tax avoidance but do not place undue administrative burdens or uncertainty on the self-employed, or restrict labour market flexibility".

IR35 review decision applauded by PCG

John Brazier, Managing Director of PCG said:

"PCG has led the way in seeking the abolition of IR35 on behalf of our members. It has caused great heartache to many people. The cost in distress has been high, but the revenue for HMRC has been minimal.

"Despite repeated Freedom of Information Act requests and Parliamentary Questions the Revenue refused to indicate the cost of operating IR35. As I said PCG believes IR35 brought in a minuscule sum, if any, for the Revenue."

The Group's chairman, Chris Bryce, added:

"Over the last few months the PCG team has had a series of meetings with the Conservative and the Liberal Democrat shadow front bench teams. We are delighted our message was heard and action taken.

"We applaud today's decision and we will continue to work closely with the Coalition Government to ensure freelance workers are treated with fairness."

Words of caution from across the industry

Recently, is was revealed that the Treasury raised just £9.2m from IR35 between 2002 and 2008.

However, this sum does not take into account the additional income tax and NIC receipts the Treasury has taken as a result of, amongst other things, contractors joining umbrella companies to avoid dealing with the tax rules altogether.

Crawford Temple, from Professional Passport said:

"The direct feedback we have received from contractors has told us that whilst IR35 is the major issue there are many other aspects of legislation that need to be included in any review.

"We have never been in favour of abolishing IR35; if IR35 were to be abolished it would have to be replaced with a new piece of legislation that could be more damaging to contractors. The old adage of be careful what you wish for springs to mind.

"The Government has made it clear that any review must produce a revenue neutral outcome; abolishing IR35 will cost the Government in the region of £500,000,000 of tax revenues. Balancing this equation is an essential part of finding the right long term solution without simply charging all contractors more."

Wait to see what form the "IR35 review" takes

Covering the recent government announcement, Dave Chaplin, CEO of ContractorCalculator commented:

"Contractors should save any celebrations until after we know the details of the review and what the new rules will be, because greater clarity over contractors' status might come at the expense of more contractors paying more tax."

Qdos Consulting also urges contractors not to be over-optimistic: "...on the face of it some good news for contractors and a step in the right direction but the devil may well lie in the detail. Therefore temper your optimism with a degree of caution at this stage as we all know too well what can lurk beneath the murky waters of tax!"

Kate Cottrell, from Bauer & Cottrell, has also long urged caution over calls for the "abolition" of IR35. You can read her popular 2009 article on the subject here.