Premature?

I think talk of giving up or leaving the country may be somewhat premature. We do not yet know the details of what is proposed and exactly what the scope of the proposals will be. We do not know if the new legislation will be in addition to IR35 or will replace it.

It remains possible that the Government will wish to continue to target what it regards as ‘disguised employment’ with measures that are over and above the existing IR35 legislation.

So, for example, IR35 may remain in place to penalise disguised employees, while new measures target the wider issue of directors of closely held companies using dividends to avoid NIC on their rewards.

This would seem logical. Unless the new provisions are to be as punitive as IR35, if IR35 is replaced by new measures that are less severe, the Government will face accusations that they are backtracking and making the situation better for those disguised employees who would have failed IR35.

This would be seen as an admission that they got IR35 wrong and that those who have been caught by IR35 over the last three years were victimised by the Government’s failure to target the right problem in the first place. I rather doubt that they will want to open themselves up to such accusations.

Hence IR591 might result in a regime that is better than IR35 but which affects those who would have avoided IR35 by virtue of passing the IR35 status tests. This would mean that the IR35 status issues remain in place.

There will then also be the question of whether the IR591 regime is designed to affect all small businesses, not just personal service companies. Will IR591 be restricted in some way to affect certain types of business but not others? If so, on what criteria?

Another uncertainty is whether the new measures will affect all profits extracted by director shareholders out of the business or only those that appear to stem from profits created by drawing salaries at below the market rate? That is, can a small family business make a ‘normal’ profit out of which dividends can be paid in the normal way and subject to the normal tax rules? We also do not know whether dividends paid to those who are not involved in the management of the business will also be affected.

Whatever measures IR591 introduces, there will continue to be contentious tax issues such as whether salaries paid to family members and friends (which the Revenue may consider are being used to spread rewards to lower tax payers) can be justified as expenses incurred wholly and necessarily on behalf of the business. It is also probable that IR591 may encourage more freelancers to seek to work as sole traders which will keep the issue of tax status at the forefront of the freelancers’agenda.

All of these uncertainties suggest that freelancers should wait to see what the details are before taking any permanent decisions about their future. It also suggests that, whatever IR591 brings, freelancers will need to keep the protection offered by tax investigation insurances and that products, like Shout99's Freelancers Outside IR35, will continue to be needed for the evidence they provide as to the businesses credentials and the contributions made by the shareholders as well as the professional representation and insurance it provides.

The scope and nature of tax investigations may change in time but their incidence is not likely to decrease.

Finally, even if IR35 were to be discontinued from April 2004 freelancers need to bear in mind that challenges to their tax status under IR35 would remain possible for up to 12 months after the submission of their last self assessment return relating to the period to 5/4/2004 – that is up to 31/12/2006.

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Kevin Miller, MA FCA
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