Has IR35 ceased to be?

29 Jul
Simon McVicker

PCG's Simon McVicker, Head of Public Affairs

Remember the iconic Monty Python “Dead Parrot Sketch” where a shopkeeper and a rather angry customer argue over the status of a Norwegian Blue parrot?

It has become a part of Britain’s folklore as one of the most entertaining pieces of television ever. Generations have been in stitches as the two debate the health, or otherwise, of this once beautiful bird and have a good old ding-dong using many and varied euphemisms for death.

 Well are we in the same situation over IR35.

 The Coalition Government clearly has an appetite for abolishing this iniquitous tax. Officially they are using the term ‘review’ however the language they have used in various documents and behind the scenes discussions strongly suggest that any review will lead to a wholesale change in the current situation.

 Some might go as far as to say its ‘dead on its perch.’

 ‘The Coalition Agreement’, the Government’s initial policy document, specifically singled out IR35 for attention: “We will review IR35, as part of a wholesale review of all small business taxation, and seek to replace it with simpler measures that prevent tax avoidance but do not place undue administrative burdens or uncertainty on the self-employed, or restrict labour market flexibility”.

 More recently the Government has carried through on the commitment the Conservatives made to PCG before the General Election – that the review of IR35 would be done through the newly created Office of Tax Simplification (OTS).  This is body that PCG will be working with to ensure that freelancers will be taxed under a fairer and more transparent regime.  Here’s what we know about the OTS:

 Announced on 20 July, the OTS will be made up of four permanent people, none of whom will be paid:

  •  The Chairman, Rt Hon Michael Jack (former Treasury Minister in the Major Government)
  •  The Director, John Whiting, Head of Taxation Policy at the Chartered Institute of Taxation (CIOT)
  •  A representative from the Treasury – to be appointed
  •  A representative from HMRC – to be appointed.

 The secretariat will be made up of Treasury and HMRC officials and they are looking to second experts.

 There will be two enquiries immediately, one of which is a Small Business Tax Simplification Review, including IR35.  The OTS should have an initial report to the Chancellor before the Budget in March 2011.

PCG is extremely well placed.  We know Michael Jack, as Andy Chamberlain our Senior Public Affairs Adviser was his political adviser in the last Parliament and we also know John Whiting from previous work we have done with him and in fact he was consulted before when we set up our own IR35 Working Party last year. PCG has spoken to Michael Jack already and we have engaged with John Whiting (a date is already set for an August meeting).

Our conversation with Michael Jack made it clear that apart from his and John Whiting’s appointment and the terms of reference of the OTS nothing else has been decided or even discussed.  He expects to see PCG in due course however he stressed this is part of a long process. 

We have a unique and historic opportunity to solve the IR35 problem which we have campaigned so hard for over the past 11 years.  We must not lose our nerve but we must also have confidence in the policy makers and experts we are now dealing with: they are we believe, by and large, on our side and see freelancers as a key component to a more flexible workforce. 

All freelancers have their part to play in the upcoming review process, we need people to demonstrate their support for the PCG lobby, to join, to participate in the debate and to ensure that the PCG goes into the next phase of our IR35 campaign with a robust case for change, backed by solid information and, most importantly, a vibrant membership behind it. 

And what of the dead parrot sketch, sorry, the dead legislation sketch?

I believe one day the last scene of the IR35 fiasco will be remeniscent of this sketch: IR35, has ceased to be. It is bereft of life. It has gone to meet its maker. This is an ex-piece of bad legislation!

I look forward to working with you all to make this a reality. 

Simon McVicker

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14 Responses to “Has IR35 ceased to be?”

  1. This is very encouraging indeed – hopefully they’ll see sense at last.

    Well done for the lobbying on this and keep up the good work.

    Any idea with respect to timescale ?

    • David August 5, 2010 at 7:20 pm #

      Let’s see what it is replaced with before we get too excited!

      • Karl August 6, 2010 at 3:21 pm #

        Couldnt agree more David, the phrase ‘be careful what you wish for’ springs to mind!

  2. Jon August 5, 2010 at 7:14 pm #

    I second Martin Katz’s comments. Please keep up the pressure to ensure IR35 is abolished once and for all. Once we have a clear and transparent system in place, freelancers like myself will be able to stop worrying about their tax position and concentrate on what they do best. This will probably be our only opportunity so let’s ensure we get a successful outcome…

  3. John FCCA August 5, 2010 at 10:25 pm #

    In the main IR35 has failed, the main result is that small co’s now have director’s salaries at the £18-24K mark instead of the £6K mark on the NIC limits.

    IR35 was pushed for time with no thought,(following Gordon’s headline about slashing Corporation Tax to 10% and then Nil on the first 10K).

    This review will have time and a bit of thought and the coffers are empty.

    The review will probably result in effective anti avoidance, be afraid, be very afraid.

  4. Andy in Oz August 6, 2010 at 6:57 am #

    I think you’re counting your parrot before it is hatched!

    have just moved to OZ and i think it far more likely that simplification will probably involve a basic rule like introduced here by our “Tories” 5 years or so back. If you make more than 80% of your income from a single client you must pay full PAYE on the entire amount.

    it’s gonna kill me!
    Andy

  5. Colin August 6, 2010 at 8:49 am #

    I agree with David above. I remember a certain Margret Thacher who said during her second election campain that she would “Do someting about the ubiquitous VAT”, then running at 15%. Well she ket her word, she raised VAT to 17.5%.
    How do know a politition is lying??????

  6. Brendan August 6, 2010 at 11:44 am #

    It’s not just IR35 that needs to be removed but also the attitude of the tax officials and government behind it.
    The PCG successfully defended the investigation I had from HMRC but during the 2.5 year investigation you would have thought that I was a convicted criminal the way me and my family were treated. HMRC got up to very very dubious activities to try and artificially set me up during that time, including intimidation. All that time and effort was wasted, never mind the stress. Even when fully proven by PCGs specialists that I was well and truly in the clear, HMRC typed a 12 page ‘non-admission’ to not admit they were completely wrong. PCG should push for any kind of ‘tax-gathering’ law to be fully transparent and accountable in its aims. Every penny spent by HMRC should be justified by more revenue coming in, and this published annually. In the case of IR35 I’m led to believe that Brown and Portillo spent something in the order of £300miilion chasing people, for a measly return of some £1.3million. I believe only three cases lost by the PCG out of some 1500 represented. I was cleared but do I trust HMRC any more? Not one bit. It is this breakdown in the relationship between government, HMRC and all you people working and paying taxes that also needs to be fully addressed by PCG. I can’t thank PCG enough for their vital support in this.

    • Steve Campbell August 9, 2010 at 10:41 am #

      Whilst I agree with this, the ex-government’s response would be that IR35 made savings by *preventing* tax avoidance, something which is impossible to accurately quantify.

  7. C August 6, 2010 at 12:01 pm #

    When I saw the title I was hoping this was going to say that there had been no new investigations launched since… whenever.

    If that is not true then IR35 is most certainly not dead and if they continue to be launched after it’s (expected) demise then there will be at least 6 more years of it.

    Also of great concern is the statement that only an “initial” report is due to the Chancellor before the buget in March 2011. I had originally hoped that they would repeal in the emergency budget stating that a replacement would be in place before the 2011 budget and when that didn’t happen it seemed that the obvious target would be for the Finance Bill that goes with the 2011 Budget.

    To fail to deliver by that date would be a pretty poor show given the urgency with which many other matters have been dealt with by the coalition and the key point is that the law that applies to a contract is the law that is in force on the start date therefore as every day goes by more and more contracts some under the sword of Damocles.

    I would urge you to in turn urge the OTS to see their timescales from that viewpoint and aim to deliver in time to have IR35 repealed in the 2011 Budget.

  8. C August 6, 2010 at 12:16 pm #

    One more thing. To my mind the key issue is double-taxation and the OTS need to focus on ensuring that nobody is being asked effectively to pay both ER NI and EE NI on the same income.

    That is what is happening when the bottom line is that s134 and it’s descendants enforces a Ltd Co on an individual and then the company (despite being “looked through”) is asked for ER NI while the individual still pays tax and EE NI.

    The self-employed person, under something like SchD, only pays tax and Class/2/4 NI at 8%. Critically, no ER NI is paid by anyone. There is an understanding an acceptance that it is not due in this arrangement and that is a key factor in understanding the nature of any solution.

    Particularly in view of the enforced nature of the company on freelancers working through an agency. What this means is that one person is paying 8% NI while another is paying 24% on their basic rate income and 1% versus 14% at the higher rate.

    The focus must therefore be on ensuring that nobody is in this (more than) double tax situation in future, whatever the structures they are (forced) to work through or indeed choose to work through.

    This applies not only to sole trader/self-employed types of structures but also to those with multiple income streams. Essentially, being forced to run a PAYE system on your own income that happens to be paid into a company should never mean that income is taxed as both employer and employee.

    Of course… the problem solves itself if you get rid of the nonsensical Employers NI that taxes the use of British-based workers.

  9. Nicholas August 6, 2010 at 12:43 pm #

    Tellingly there has been no mention of preserving the status of the corporate entity. It is probably safe to assume that IR35 will be replaced but I fear that its successor will be even less kind to freelancers than IR35; removing the uncertainty but not the additional tax burden.

    IR35 was ostensibly put in place to prevent abuse by large organisations who forced their employees to become self-employed contractors so they could avoid national insurance contributions. It was not presented as an anti-avoidance measure for genuine freelancing contractors.

    Let’s be clear about this, the reason for working through a limited company is not purely for tax advantage or preservation of capital. How many freelancers would gain work if they did not agree to work through a limited company? The clients or the agencies do not want to be held to be an employer for their own gain. Unless the review addresses this issue fully, the outcome will be as just as unfair to freelancers as IR35.

    Further will the review address the discrepancy between a status for taxation status and a status for state benefits? Why is it fair to be a deemed employee for taxation and not then be deemed an employee for state benefits?

    As Andy from Oz illustrates, I fear the focus of the politicians will be how to raise the tax whilst not upsetting large corporations who have greater lobbying power. Certainly, I doubt they will have any regard for the fundamental contradictions and inequities that will arise from its application.

  10. Clive August 6, 2010 at 1:05 pm #

    I will, this weekend, pick up my trusty ink pen, and write to my MP and encourage him to support these gentlemen, and to make him aware of the probable numbers of freelancers in his constituency.

    I’d very much like to quote some numbers to support that claim – are there any such figures available (South Basildon and East Thurrock).

    Furthermore, I feel if some guidance on choice phrases, or points that we should include in our letters were given here, thenmore folk who are willing-but-not-sure-what-to-say, would also write to their MP and get their voice heard (http://findyourmp.parliament.uk)

  11. melonfarmer August 10, 2010 at 6:34 pm #

    Clive, I wrote to my Lib Dem MP in May to remind him of his party’s commitment to reviewing IR35. I got a reply in July saying the Treasury had been passed my email and required further information. This was just after the OTS was announced so I stated that the review was sufficient. My email consisted of:

    As a member of the PCG, it would be very beneficial to my business if both members of the coalition act on their pre-election pledges to tackle the question of small business taxation, namely the implementation of IR35/591. IR35, though well meaning in its original intentions, unduly distracts independent consultants/freelancers from their primary focus of providing the economy with a flexible, motivated work force.

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