IR35 is here to stay, and the latest publication from HMRC could mean big changes in the way the legislation is currently administered.
Our Contracts Manager Sam Mikkelsen has dissected the latest publication from HMRC and breaks down the highlights.
IR35 has been a hot talking point with IT contractors for many years. ‘Substitution’, ‘Control’, ‘Disguised Employment’, ‘Mutuality of Obligation’. These are just some of the words that send shivers down the spine of any UK based IT contractor.
The legislation was introduced in 2000 to tackle the avoidance of employment taxes by individuals working through intermediaries (mostly their own Limited Company), better known as Personal Service Company (PSC).
It is widely speculated that because the demand for IT Programmers rose due to the Y2K or ‘Millennium Bug’, permanent staff were being headhunted for contract roles doubling, sometimes trebling their then permanent salary. Some programmers in permanent roles found themselves with multiple offers for contract positions, but then accepted counteroffers to remain with their current employer, but as a contractor. They found themselves with an Ltd Company or PSC, paying themselves a minimal salary and of course enjoying large dividend payments. At the same time though sitting next to a permanent member of staff and performing exactly the same role. These first-time contractors could end up working ‘on contract’ for that same company for up 2 years, sometimes longer.
It is worth noting that HMRC recognises that there are many legitimate, commercial reasons for people to work through a company and for businesses to engage individuals this way. The government also recognise the benefits to the economy of a flexible labour market and has no intention in stopping people from working in this manner. However, HMRC also feels that some individuals can take advantage of working in this ‘self-employed’ capacity and unfairly manipulate the rules. It is for this reason that IR35 was introduced to address what is now known as ‘Disguised Employment.’
The Recruitment industry has lobbied strongly to abolish IR35 but it has always been clear that the Exchequer was determined to ensure ‘fair tax for all’. So over the last 15 years, the industry adapted to the legislation and work with the Revenue for a fairer a clearer way of enforcing this tax. Last month HMRC published an 11-page document entitled ‘Intermediaries Legislation (IR35): Discussion document. The document sets out a framework for discussions across three main areas.
The Rationale for change
Options to improve the effectiveness of the rules
In the introduction, HMRC states its’ intention to “engage with stakeholders over the next few months to explore options in making the legislation more effective in protecting the Exchequer” – This is a very clear indication that IR35 is here to stay.
Some of the other highlights of this document include;
- Non-compliance with the legislation has been highlighted recently and there is growing evidence of this. The number of people paying tax under IR35 has not changed significantly since the legislation was introduced. However, the number of PSC’s has increased substantially in 2012 – 13 an increase of 65,000 on the previous year alone.*
- The government estimates that non-compliance with the legislation will cost the Exchequer £430m in tax and NIC’s (National Insurance). Without reform, this figure will grow.
- It was estimated that a further cost of £520m in tax receipts was protected due to the deterrent effect of the legislation in 2010-11.
- HMRC recognise that there are low levels of compliance and that there are general uncertainty and complexity in determining whether an engagement falls within IR35. HMRC wants to work with stakeholders (the industry) to ensure reform makes the rules simple and straightforward to comply with.
- The government want to consider options to reform the legislation by levelling the playing field between those who are employed directly and those who would be employed directly if they were not operating through their own company.
- The government also wants to make the legislation straightforward to comply with as possible. Some of the options include improving the administrative approach to IR35 and move that burden to the engager who would tackle the challenges in enforcing compliance and responsibility on whether the worker should be self-employed or actually an employee. If so the engager would become responsible for deducting the correct amounts of income tax and NICs as they would be the direct employee. It isn’t clear whether the engager is the recruitment consultancy or the end client.
- The reform will also look to simplify the test for determining whether IR35 applies. The criteria might well focus on ‘supervision’, ‘direction’ or ‘control’ of the individual and may well also include the length of the engagement and whether a minimum amount of time would be considered one of employment.
- Throughout the document, it is made clear that the government would welcome evidence and views on potential reforms or options around all of these specific topics.
It is clear after reading this document that IR35 is definitely here to stay and this consultation is a refreshing, but long overdue approach.
As a recruitment company ourselves though, there is room for cautious optimism. On the one hand, the government want to ‘level the playing field’ and simplify the ‘IR35 rules’ for individuals who operate through a Limited Company / PSC, but on the other hand, it looks highly likely that the administrative burden of IR35 might land on the laps of the engager. i.e a recruitment company and/or end-user client.
Only time will tell how IR35 will change and what it will look like in 12 months time, but I am sure the lobbyists who are active in this area like the REC, APSCO and the IPSE, (formerly the PCG) will be actively sharing their own views, evidence and ideas on how they can actively protect the interests of their members. One thing is for certain in my humble opinion, is that IR35 is definitely not going away and is here to stay in one format or another, the rules might become easier to follow but like with the offside rule in football it will continue to attract controversy and debate that will never end!
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