IR35 knockout blow

The Office of Tax Simplification (OTS) announcement today amounted to an open call to scrap the IR35 tax rules. Designed to inform the chancellor before the budget in two weeks, the small business tax review’s strongest recommendation was to combine income taxes and national insurance contributions.

This was suggested, not only to simplify the tax system, but to reduce the incentive to represent oneself as self-employed. Alongside this it was recommended that the boundary between employed and self-employed be clearly defined, no matter what industry you choose to go into. This combined with other tax simplifications for self-employed people would prevent them from being unfairly hit by the proposal.

To quote the report directly:

“Terms such as consultant, freelancer, contractor, sub-contractor and agency temp are commonplace and suggest self-employment, but in reality they are often just labels, as each one could fall into employed status based upon the current boundaries, which are not always clear. Many argue that there are now three categories:

• Self-employed;
• Employed; and
• Freelancer.

3.19 Currently anyone considering working for themselves, or setting up their own business undertaking work for others, may have little certainty over their employment status.”

They have definitely highlighted how convoluted the current system has become and how improvements can be made that benefit of everyone. Overall I think, as long as these recommendations are implemented properly, we will all benefit from a simpler, fairer tax system.

In regards to IR35 there are two options set out:

• Suspend IR35 with the intention of permanent abolition, using the period of suspension to investigate behaviours and costs; or

• Keep IR35 legislation unchanged, but improve the way it is administered by HMRC.

As you can see, they haven’t called for an abolition of IR35 directly, but indirectly we will either see it go completely or become something totally different. For once it seems, even though the tax system might change we are confident that it might change for the better.

If you want to read the report directly you can follow the link:

http://www.hm-treasury.gov.uk/d/ots_small_business_interim_report.pdf

Check out our follow up article for a more in depth analysis of the small business tax review. We uncover more of its recommendations and start to assess what it means.