Doubt is cast on HMRC new IR35 proposals for contractors

Earlier this year, HMRC announced its plans to introduce an IR35 status test for contractors working in the public sector. Although in principle there are significant benefits to contractors, there’s always been a question of how HMRC will administer the process to make it easy to understand and accurate.

In August, HMRC published its consultation response which saw almost every respondent echo the initial concerns about accuracy and simplicity.
Now the Office for Tax Simplification (OTS) has also cast doubts for the very same reasons. The OTS was set up to review and challenge the tax system to be simpler so it can be understood ‘by the common man’.

The OTS reviewed the proposed test and pointed out that “The first two parts of the test do not give certainty as the decision provided is not binding.” This confirms the thoughts of most within the contract industry, so it’s refreshing to hear OTS confirm this, but we’re yet to know what will be done about it.

In addition to the introduction of a test, there is some complexity in the calculation of tax, where those considered to be ‘inside IR35’ will have to pay tax as an employee would. However, the proposal is that the organisation paying the Limited Company contractor will be the ones to calculate taxes and pay HMRC (rather than the contractors company). Yet, the company will still have an obligation to pay VAT.

In response to this, OTS said “Having someone treated as an employee yet still having to charge VAT has overtones of the tax system having its cake and eating it; it also adds further to public sector costs given that in many cases the engager may not be able to recover the VAT charged.”

In March 2011 in the OTS Small Business Tax Review – Interim Report, OTS called for IR35 to be suspended as they believed that it’s “not effective, either for the individuals affected or for the Exchequer”. Clearly, this advice was not taken and HMRC continue to pursue the approach.

Over the past 10 or so years the UK economy has changed drastically, with far over 1.91m individuals operating on a freelance basis (IPSE, 2015). This means a significantly greater change in employment statuses for individuals. For this reason, many within the industry have been calling for a review of tax and employment status as an holistic approach, rather than simply ‘employed’ or ‘unemployed’.
Interestingly, the OTS have also confirmed their belief in this approach asking for “a project to try to develop a simpler test that can provide binding certainty taking into account both tax and employment status.”

It’s still early days, but this could be the first real acknowledgment and step towards a clear status indicator. Perhaps even a third employment status, somewhere between employed and unemployed.