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What is the current status of IR35?

The IR35 rules are still in place in early 2012, but are due an administrative overhaul which may be implemented as early as April 2012, according to the body tasked with simplifying small business taxation.

The birth of IR35

On 9th March 1999, the Inland Revenue first published a press release outlining the Government’s plans to counter tax avoidance via the use of ‘personal service companies’ (particularly in the IT contracting sector). ‘IR35’ became law in July 2000 as part of the Finance Act.

The prime aim of IR35 is to clamp down on the use of limited companies by workers who would ordinarily be classed as ’employees’ and taxed as such, according to HMRC’s employment status tests.

Over the subsequent decade, business groups (especially contractors’ organisation, the PCG), and taxpayers fought hard against rules which they see as untargeted, and unfair. The official guidance has been blamed for creating uncertainty over IR35 status, and status reviews themselves have often been untargeted, and lasted years.

OTS – interim report

As a result, the newly-formed Office of Tax Simplification (OTS) was tasked with making proposals for the future of IR35, as part of its brief to simplify the way small businesses are taxed in general.

In March 2011, the OTS presented its interim report, which contained three proposals for the future of IR35. The first was to suspend IR35, with a view to abolishing it entirely in the future; the second was to create a series of new business tests to determine employment status more simply.

However, the Chancellor George Osborne decided to take the third option – to keep the IR35 rules in place, but to ensure that the way HMRC currently deal with IR35 is overhauled entirely. It was deemed that abolition of the legislation would put ‘substantial revenues at risk’, as the deterrent effect is thought to generate hundreds of millions for the Treasury each year.

As part of the recommendations presented by the OTS, a new IR35 forum was set up, tasked with improving the way IR35 is currently administered, and overseeing the implementation of these proposals.

The forum has met several times since its inaugural meeting on 6th May 2011, and is attended by a host of industry and accounting experts, as well as HMRC employees. The group has discussed a wide range of topics, ranging from how to improve the current risk profiling of potential IR35 candidates, to improving the guidance available to members of the public.

OTS – final report

In March 2012, the OTS released its final report into small business taxation which states that the Government intends to look more into how so-called ‘personal service companies’ are used to disguise employment, and provide much-improved guidance to help taxpayers work out easily if they are likely to be caught by IR35.

The body states that it expects ‘substantive progress’ to be made by the IR35 forum, and changes to the administration of the rules may be announced as early as April 2012.

How to comply with the IR35 rules

Any changes made to the administration of IR35 are unlikely to have any effect on the status of the legislation itself, so naturally you should still ensure that you comply with IR35.

We recommend you seek the services of a professional IR35 contract review service, and consider taking out IR35 insurance (which is not expensive), just in case. You can find out more in our guide to protecting yourself against IR35.

Further Information

You can read the minutes of all the IR35 forum meetings on the IR35 site here.

Access the Office of Tax Simplification (OTS) reports here.

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