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In the recent Summer Budget, the Government had claimed that IR35 was not effective enough and non-compliance in this area was estimated to cost over £400 million a year. (See: (3):Attack on contractors' 'disguised employment' - IR35)
The documentation at the time said "The Government has asked HMRC to start a dialogue with business on how to improve the effectiveness of existing IR35 legislation. The Government wants to find a solution that protects the Exchequer and improves fairness in the system."
The Intermediaries Legislation (IR35): discussion document sets out a framework for discussions between HMRC and stakeholders to explore options to make the intermediaries legislation, IR35, more effective.
Using language which is not dissimilar to that used by the Labour Government who introduced the measure in 1999, the document says that HMRC will engage with stakeholders over the next few months to explore options to 'make the legislation more effective in protecting the Exchequer and leveling the playing field between direct employees and those who work in a similar manner to direct employees but through their own limited companies'.
The 11 page paper sets out a framework for those discussions and covers:
- The rationale for change;
- Options to improve the effectiveness of the rules; and
- Next steps.
The rationale for change
With a similar justification for the introduction of the measure, the paper claims that it 'is unfair as two people doing the same job, in the same way, can end up paying very different levels of tax depending on how they are engaged and this costs the Exchequer a significant amount each year...........
'.........People who work through their own limited company can pay an even lower effective rate of tax and NICs than either the self employed or employees. This is because of the interaction between allowances available and rates paid in the corporate and personal tax systems, and the absence of NICs on investment income, including dividends received from PSCs. (Personal Service companies) .
The Government estimates that noncompliance will cost the Exchequer £430m in tax and NICs receipts this year and, without reform, it expects this loss to continue to grow.
Options to improve the effectiveness of the rules
The Government restated its two objectives:
- The need to protect the Exchequer; and,
- Leveling 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.
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One of the earlier options for improving the operation of the legislation had been to look at administrative changes as recommended by the IR35 Forum. This is likely to be revisited as it was felt that while it had some positive outcomes, it didn't fully address the shortcomings of the current rules.
However, the changes are likely to be more radical than seeking to improve compliance within the existing system. The paper said: "Another option could be to further improve HMRC’s compliance response but, as set out earlier, the Government does not believe this alone is sufficient to tackle the size of the problem as interventions focus on each individual engagement and often require input from several parties, not all of whom have a clear responsibility to co-operate with HMRC."
The paper trails the possibility of putting more onus on the engagers to police or enforce the legislation. It says: "Under such an arrangement, those who engage a worker through a PSC would need to consider whether or not IR35 applies (in the same way as they would need to consider whether a worker should be self-employed or actually be an employee), and, if so, deduct the correct amounts of income tax and NICs as they would for direct employees. However, the Government recognises that this would increase the burden on engagers and would welcome views on this potential option, including how it could be made as straightforward as possible for engagers to determine whether IR35 should apply as part of their routine hiring conversations."
Other options suggested include:
- aligning the test with that used for temporary workers in the agency rules, which is based on supervision, direction or control;
- looking again at some of the suggestions considered by the Office of Tax Simplification, such as requiring an engagement to last a certain minimum amount of time to be considered one of employment.
Next steps
HMRC will be contacting a range of stakeholders who they expect to have an interest in developing options for reform, or would likely be affected by any change in this area.
If anyone would like to be involved in these discussions or to provide written views on this subject, please contact HMRC by email at ir35.reform@hmrc.gsi.gov.uk.
HMRC wants comments by the end of September 2015.
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Susie Hughes © Shout99 2015
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