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OTS IR35 interim report - what does it say?
Posted Mar 10, 2011
The Office of Tax Simplification (OTS) has published its interim report into the way small businesses are taxed (PDF here), which includes recommendations on how to deal with the IR35 legislation.
Although no obvious way forward exists, given the complexity of the current Intermediaries Legislation, the tax body has provided several possible ways forward:
No clear cut legislation alternative to IR35
During the consultative period, the OTS met with dozens of key individuals and organisations who have had experience of dealing with the IR35 legislation. The body also considered the experience of other countries who have some shared experiences in this area.
However, no one solution was found, as the types of people affected by IR35 are so diverse, so a "one size fits all" approach was deemed to be unlikely to work.
Possible IR35 solutions
The following solutions have been put forward by the OTS, to work alongside objective of integrating the income tax and national insurance (NIC) systems:
1. Suspend IR35, with a view to abolishing the legislation permanently
Although abolition would be a popular decision within the contracting community, the OTS notes that such a move would result in a much greater use of limited companies to reduce tax liabilities. Many workers would move from umbrella companies to limited companies, reducing the amount of NICs received by the Treasury.
The OTS proposes that IR35 should be suspended initially, with the formal process for ending the suspension to be "formally announced".
The long-term integration of income tax and NICs would reduce the long-term risk of abolishing IR35.
2. Retain IR35 legislation, but with improved HMRC enforcement
Improving the way HMRC deals with IR35 would include removing the fear of investigation, reducing the length of time investigations take, and removing the lack of consistency by IR35 when dealing with IR35 cases.
3. Introduction of 'genuine business' tests
If the Government chooses not to implement either of the first two options, the report suggests that they may consider the introduction of a genuine business test to exempt certain businesses from IR35 entirely.
A range of simple tests could be drawn up, which would provide at least 90% of businesses with certainty over whether or not they are caught by IR35. The OTS recommends "rigorous analysis and consultation" on the criteria to be used in any tests prior to implementation.
Read our analysis of the three OTS IR35 recommendations here
Reaction
You can read reaction from a cross section of contracting industry experts and commentators here.
Download the Report
You can download a copy of the OTS interim report here.
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