The Intermediaries Legislation (IR35)
This legislation was introduced in 2000 to tackle disguised employment. It exists to ensure that individuals that fall inside IR35 pay broadly the same tax and NI as employees.
In the summer budget the Chancellor announced that this legislation is ineffective and non-compliance is expected to cost the UK £430 million this year.
At this stage HMRC have created a discussion document to invite stakeholders to provide feedback required to inform future policy creation.
The areas they hope to address are:
- Why there has been a significant increase in the number of Personal Service Companies (PSCs) but not an equivalent increase in IR35?
- If the estimated IR35 non-compliance figure is correct at 90%?
- What the true cost to the exchequer is?
- How the rules could be improved to remove unnecessary complexities?
Apart from lost revenue the Chancellor is keen to encourage a fair economy and as it stands the government feels that those PSCs not complying with IR35 have an unfair tax advantage over employees and the PSCs who do operate within the rules.
Will IR35 be removed?
As you can imagine there was much debate during the discussion event and despite it being suggested multiple times IR35 is not about to be abolished any time soon.
Instead the tests to establish if a contract is going to fall inside IR35 are likely to be simplified.
Simple = Better? (Probably not)
Simplified IR35 rules don’t necessarily mean good news for PSCs. Initial feedback indicates that the ‘Supervision, Direction and Control’ tests are likely to be adopted on their own.
However as you may be aware these conditions only form a small part of the current test process and you can still fall outside IR35 if you have a strong case in other areas for example:
- right of substitution,
- financial risk,
- contract clauses,
- requirement to provide tools & materials
- and rectify work at your own cost etc.
Another suggestion to simplify IR35 was to create a sector specific list of the roles that would be classified as falling inside the Intermediaries Legislation. HMRC indicated that the following examples were being considered:
- Social Workers
- Supply Teachers
- Crane Drivers
End client compliance checks
HMRC admitted that IR35 audits don’t happen very often and that the outcome is not always successful in HMRC’s favour. They actually prefer not to pursue cases they are not more than 50% confident of winning, as any cases lost in court could set a future precedent for others to follow.
With this in mind they are reviewing ways to move the compliance responsibility away from the PSC. The suggestion was to pass IR35 checks and employment status decisions onto the Intermediary or End Client.
Of course the argument against this was in relation to additional burden and red tape that would be added to the recruitment sector, which is already highly regulated.
What was clear by the end of the discussion event was that IR35 is not a problem isolated to the UK and that HMRC, end clients, agencies and PSCs need to think of other, simpler ways to manage the increasingly popular flexible work approach that many are choosing to adopt in 2015 and beyond.
To be continued…
This topic is likely to rumble on for many months yet and we are sure that there are many twists and turns still to come on this subject. Of course as we learn more information we will be sure to share it with you.
To discuss how IR35 currently affects you or if you’d like to give us your opinion on this matter, which we’d be happy to share at our next HMRC event,