26 October 2010

IoD Welcomes IR35 Review

The Institute of Directors (IoD) has welcomed the news that the Office of Tax Simplification (OTS) has begun to examine the controversial IR35 legislation, which affects millions of freelancers up and down the UK, but has urged the government to follow up its pledge to simplify the tax system by taking the OTS's findings seriously.

"IR35 needs to be simplified," the IoD said upon publishing its initial submission to the OTS. "It burdens business people with lengthy tax investigations that very often produce no result for the Revenue. It applies vague criteria, so neither business people nor the Revenue can predict the outcome of an investigation, even once all of the facts are known."

"The key thing is to ensure that new tests to determine tax treatment can be applied mechanically," the Institute added. "Vagueness must be banished. And there needs to be an initial screening test, to take as many businesses as possible out of the scope of the successor to IR35 before they have to get down to the detailed tests."

Richard Baron, Head of Taxation at the IoD, said: “The Office of Tax Simplification is very well-placed to come up with something better than the current dog’s dinner of IR35. It has both the expertise, and the necessary remit to take the views of outsiders."

IR35, formally known as the Intermediaries Legislation, was introduced on April 6, 2000 to eliminate the avoidance of tax and National Insurance Contributions through the use of intermediaries, such as Personal Service Companies or partnerships, in circumstances where an individual worker would otherwise for tax purposes be regarded as an employee of the client. However, the legislation has been ineffective in raising additional revenues and has resulted in millions being spent on litigation as a result of challenges to HM Revenue and Customs's (HMRC) IR35 claims against freelancers.

Of the approximately 1,500 IR35 cases it was involved with, HMRC has proved additional tax was owed in around 10 cases, according to the Professional Contractors Group (PCG). However, despite repeated Freedom of Information Act requests by the PCG and Parliamentary Questions the Revenue refused to indicate the cost of operating IR35. But the PCG's Managing Director, John Brazier, believes that IR35 "brought in a minuscule sum, if any, for the Revenue.”

The OTS was launched by Chancellor George Osborne on July 20, 2010 to provide the government with independent advice on simplifying the UK tax system. The Office has been established as an independent Office of the Treasury and will draw together expertise from across the tax and legal professions.

Osborne said at the time of the OTS's launch that: "A decade of meddling and intervening has made the tax affairs of millions of families and businesses across the UK extremely complicated. We need to sort out this mess." However, Baron suspects that the "real challenge" will be for the government when the time comes to consider the views of the OTS.

"Will it show that it means business about tax simplification, by accepting the Office’s recommendations when they appear or giving a watertight reason for rejecting them?" he observed.

"The Office should not pull its punches. It should make a strong case for its preferred solution, and put Ministers on the spot," Baron said.

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