Making public sector bodies responsible for applying IR35 tax rules will be a ‘lose-lose’

Abolition of the controversial IR35 tax regime for personal service companies is not an option, the government declared in a July 2015 discussion paper. Instead it decided to try to make the legislation more effective without widening its scope.

It did so in this year’s Budget, announcing that public sector organisations will have a new duty to ‘ensure that those working for them pay the correct tax rather than giving a tax advantage to those who choose to contract their work through personal service companies’.

IR35 specialists have criticised the reform. Andrew Chamberlain, deputy director of policy at the Association of Independent Professionals and the Self Employed (IPSE), says it is ‘only likely to create a lose-lose situation’.

Read more: My article for Accounting and Business September 2016, published by ACCA.

Tax experts and industry bodies urge HMRC to rethink IR35 reform plans

Freelancers and contractors could be forced out of the public sector by planned changes to the way off-payroll staff are monitored, the government has been warned.

Tax experts and industry bodies have urged HM Revenue and Customs to reconsider its plans to switch responsibility to public sector bodies for applying an established but controversial tax rule intended to counter arrangements designed to disguise employment.

Amid claims that the change could lead to an exodus of contractors, HM Revenue & Customs told CSW that the “genuine self-employed” would not be affected. “This measure is about public sector workers paying the right tax,” a spokesman said.

Read more: My news story for Civil Service World, 19 August.

HMRC pursues IR35 reform for public sector work despite criticism

Proposals to shift responsibility for applying a controversial anti-avoidance rule to the public sector will impose “punitive” taxes on public sector organisations and micro-businesses, according to a trade association representing freelancers …

HMRC launched a consultation on May 26 on changes intended to improve the effectiveness of IR35.

[Read more: My news story for Tax Notes (paywall) published by Tax Analysts.]

Here is HMRC’s consultation, which closes on August 18.

A tax compliance update

I’ve written an issue of Tolley’s Tax Digest to be published in June 2016. Topics include:

  • making tax digital and “simplifying” payment arrangements;
  • tax evasion, avoidance and non-payment – the latest measures and consultations;
  • Office of Tax Simplification – a consultation and reviews on income tax and NICs, and small company taxation; and
  • self-assessment – summarising recent measures including “simple assessment” and new information requirements and penalties.

See also published work.

IR35 analysis: ‘Uncertainty in the evidence base’ (AccountingWEB)

A leading tax expert called for clarity over the rationale behind IR35 yesterday, as a Lords committee’s call to re-examine the “longer term case” for combining taxes on income and NICs was backed by AccountingWEB members.

Patrick Stevens, tax policy director at the Chartered Institute of Taxation, told AccountingWEB: “At the moment it seems to be that if the relationship between the person doing the work and the end user would be employment if there were no entities in the way, then the total amount of tax and NICs to be paid should be the same as if there were no entities in the way. That is what IR35 aims to achieve. If this policy is to remain the same the only question is how to enforce it better.”

He added: “If the intention is to change the policy so that inserting a company in this situation will change the basis of taxation as though someone were effectively self-employed, then everyone should be entitled to that and all employees who set up such a structure can have a more favourable tax position.”

Read more at AccountingWEB.

Lords inquiry lobbies for IR35 reform (AccountingWEB)

Peers have called on HMRC to do more to show that revenue protection provided by IR35 outweighs the cost of the legislation, after a four-month inquiry found that the regime can arouse “considerable hostility” among contractors. Stressing that the present structure of small business taxes provides an incentive for incorporation, the House of Lords personal services companies committee said the government should consider combining income tax and national insurance contributions.

The IR35 rules are intended to ensure that people providing services through intermediaries pay the same income tax and NICs as someone employed directly, if their arrangements amount to “disguised employment”.

But IR35 raises its own problems, said committee chairman Baroness Noakes at the end of an inquiry that began with a leading expert describing the regime’s contract-by-contract approach as “innately clumsy”. That approach can make the rules “especially cumbersome”, the committee said, and compliance requires “a sound understanding of case law”.

Read more at AccountingWEB.

IR35: Peers hear evidence from business groups

I wonder where the House of Lords inquiry into IR35 is heading. Peers on the personal service companies committee have now heard from HMRC and representatives of business groups, professional bodies and the Office of Tax Simplification.

Yesterday Martin Hesketh of Brookson, an accountancy firm providing services to contractors and freelancers, suggested that the IR35 legislation should be left alone. Where there was uncertainty, case law was providing the answers.

But representatives of the Federation of Small Businesses and PCG told peers that IR35 was unnecessary. Chris Bryce, chief executive at PCG, said the legislation was now “redundant” and should be abolished.

It is difficult to see IR35 being abolished without a major change in the tax and NIC rules. The continued absence of an NIC charge on dividends provides a major financial incentive for “freelancers” to operate via a company. But in recent years many engagers or “end user clients” have insisted on the arrangement in order to save employer NICs and eliminate the risk of a PAYE enquiry.

My report for AccountingWEB on the committee’s first evidence session last month is here.

My short Storify account of key points from yesterday’s session is here.

The Lords committee’s call for evidence (written evidence is invited by 31 December) is here.

See also Finance Bill 2014: New focus on control to tackle false self-employment.