The IR35 review
Arguably the most talked about subject in the world of contract employment over the last 12 months has been the much anticipated HMRC review into IR35 administration. And earlier this month the wait was finally over, but was it worth it? Put simply the answer is no, not by a long way.
The IR35 rules background
Introduced by HMRC to safeguard contractors from being exploited by non-compliant umbrellas, and to resolve the £900 million loophole in tax law, IR35 is tasked with preventing companies from averting tax payments and retaining the ‘profits’ for their own means.
In 2011, the Chancellor introduced improvements to how it administers IR35, which included a year later the establishment of the IR35 Forum, a group of external stakeholders who meet HMRC on a quarterly basis. All was well, and certainly an initiative that we, at One Click Umbrella, supported. But whilst the intentions of the Forum were good, their delivery has left most of us in the sector feeling disappointed to say the least.
The findings of the HMRC IR35 review
Industry reaction to the findings has been overwhelmingly negative. Despite being 48 pages in length and taking over a year to complete, the review falls short of providing any real tangible benefits for contractors. Some observers say that the review “won’t change a thing” and it amounts to little more than a “PR plan for IR35”.
But is such criticism justified? We think so, and here’s why:
The scrapping of BETs (Business Entity Tests) – which were commonly considered to be a needlessly complex series of questions designed to determine whether a contractor was high or low risk – before the publication of the review, effectively robbed the review of its trump card. With BETs removed, HMRC held back from adopting any of the targeted approaches recommended by the review such as identifying the various segments that make up the IR35 market – what does the IR35 population look like and how will HMRC target the right product to the right groups?
10 out of the 32 recommendations put forward by the Forum and adopted by the review are hardly game-changers and amount to little or nothing of note for contractors.
For many of us who have campaigned for HMRC to reduce the burden on compliant taxpayers and create a sense of clarity to make it easier for them to establish that they are compliant or not, this review is nothing short of disappointing.
Between 2013 and 2014 there was a four-fold increase in the number of new IR35 investigations. This is partly the result of confusion over what it means to be compliant and partly because some recruiters failed to check the terms of the overarching contract of employment they have with their Umbrella company. Indeed, recruiters need to ensure they check for things such as guaranteed number of contractually agreed paid hours, evidence that their Umbrella Company’s expenses policy is in line with HMRC rules, for instance.
The IR35 and Uk’s tax legislation’s perspectives
IR35 has been around for 15 years and it is not likely to go away any time soon.
Whilst everyone who needs to know about it (i.e. contractors, accountants and recruiters) know about it, HMRC needs to up the ante and enforce it in order to clamp down further on those who continue to avoid paying tax. This review offered the chance for HMRC to demonstrate what progress had been made since the introduction of its new approach in 2012, which is what many of us had hoped for. But this was not forthcoming.
With a number of changes taking place to the UK’s tax legislation over the last couple of years, contractors would be forgiven for feeling slightly confused by what these changes may mean to them. If you are unsure whether your Umbrella Company is compliant with IR35 or if you would like to find out more information about how it affects you, we will gladly answer any questions you may have. Equally, if your recruitment agency specialises in sourcing and placing contract workers and you’d like to find out more about how the law currently stands, we’ll be happy to hear from you.