IR35 Reform up for Discussion

Following the Summer Budget there has been a definite move by the Government to try and equalise the tax paid by employed people, the self-employed and owner managed businesses. The first step towards this goal was the announcement that tax will now apply to dividends, once an individual has exceeded their new dividend allowance of £5,000. This will affect everyone who draws a dividend from their company in excess of this amount. I will discuss this in more detail in my next blog, once the dust has settled and we have crunched some numbers to see the real impact on tax payers.

Another example of where the Government is trying to level the playing field is in respect of one man band companies, commonly referred to as Personal Service Companies (PSC). Every company has to consider the impact of IR35 on their company. IR35 was introduced in 2000 to tackle ‘employment tax’ avoidance by those who work through intermediaries, particularly their own PSC. The legislation required individuals working through an intermediary to pay similar tax and NICs as those self-employed and directly employed. However, the legislation has never worked as effectively as expected and many who are employed through a PSC continue to avoid tax, despite carrying out similar work to those directly employed. IR35 remains a problem for the government and is costing the Exchequer a significant amount each year (£430m in fact).

To tackle the non-compliance of PSCs, on the 17 July, HMRC published its Discussion Document, outlining their proposed changes to IR35. HMRC has suggested various updates, which range from minor administration changes to major legislation reforms. However, the key change, which is set to divide the industry, is that of increasing the role of engagers.

Radically, it has been suggested that those who engage a worker through a PSC should be responsible for ensuring the right amount of employment taxes are paid. Therefore, where a worker carries out similar work to an employee, the engager would need to consider whether or not IR35 applies and if so, ensure that the correct amount of tax and NICs is deducted.

If approved, this change is going to place a considerable burden on engagers. At this point, HMRC is calling for the view of stakeholders, particularly in regards to whether such an approach would be effective, how it could be as straightforward as possible and whether there are any types of engagers that would face particular challenges.

My only concern, as we have seen in the past, is that despite extensive lobbying and “there is no way they can pass this” comments, the Government has a way of passing significant legislation that has a substantial impact on a lot of business owners. A classic example of this is the Advance Payment Notices, which has recently been passed, where taxpayers are going to Judicial Review where the legislation is wholly unfair.

I will be keeping a close eye on the proposed changes via our connection with APSCo, who are one of the organisations responding to the document, and will provide updates as they happen.

HMRC are inviting responses to their document, which can be made directly to HMRC by emailing ir35.reform@hmrc.gsi.gov.uk

The full discussion document can be viewed here.

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