IR35: Still not fit for purpose
- 1 Oct 2015
Fighting IR35 lies at the very heart of what IPSE stands for. It was the reason our organisation started. Since then we have broadened our focus to take into account a wide range of issues surrounding self-employment but the burden imposed by IR35 remains at the very top of our agenda.
The legislation is designed to prevent “disguised employment”, where employers engage their employees through limited companies to avoid the need to pay Employer’s NICs, sick pay and holiday pay, while the employee benefits from a reduced tax bill. However, there are longstanding problems with the way HMRC determines whether a worker should be taxed under IR35, and genuine businesses are unfairly impacted all too often.
The IR35 discussion document published in July set out Government’s intention to reform IR35 and offered three proposals. It should be noted that a ‘discussion document’ is less formal than a consultation and we have been told that the policy is not set in stone – however, the direction of travel is ominous and we at IPSE are very concerned.
Imposing the burden on the engager
The first and potentially most damaging reform suggested by Government is to shift the responsibility of determining whether IR35 affects an engagement onto the client. This will not work in practice, not least because IR35 is too complex; it is almost impossible to determine with any degree of accuracy whether it applies. Most engagers will seek to reduce the administrative burden and refute any liability by declaring all their contractors to be under IR35 regardless of the actual working practices.
Narrowing the test to include only supervision, direction or control (SDC)
The suggestion is to reduce the IR35 tests to only consider whether Supervision, Direction or Control applies to the engagement. This would mean disregarding the personal service test (whether the worker could send a substitute) and the mutuality of obligation test, along with other less well established tests such as whether the worker ‘part and parcel’ of the client organisation. The adoption of the ‘or’ in supervision, direction or control should also be noted. It was previously an ‘and’. The change implies only one of ‘supervision’, ‘direction’ or ‘control’ needs to be present in order to declare the engagement to be under IR35. Previously, it was necessary to demonstrate all three were in place.
Our survey results were clear that HMRC’s definitions of SDC are vague, unclear and could be applied to almost any engagement in which the client oversees the contractor’s work or provides them with “guidance” on how the work should be done.
Applying these definitions would result in the vast majority of engagements falling automatically into IR35, simply as a result of a commonplace interaction between contractor and client. If, for example, there is some feedback between the client and contractor between the brief and finished article, or if the client explains that products are usually demonstrated using one particular method, then the contractor will be deemed to be under SDC.
Requiring a minimum length of engagement before it could be considered one of employment
This is essentially a period of grace would be granted to engagements that do not exceed a certain length of time. It would be good news for businesses operating on short-term contracts of, for example, a few months. However, it does create a risk that when the minimum length of engagement is reached, the contract could be terminated prematurely, even when the arrangement is working well for both parties.
The risk to business
These proposals ignore the legitimate reasons that most freelancers set up a limited company. They will create even more uncertainty among the UK’s smallest businesses, who will face a substantial and unnecessary risk of being unfairly subjected to IR35 rules – and a substantial threat that they will no longer be able to take on key contracts in vital sectors such as oil and gas, the nuclear industry and financial services. It seems more likely the proposals will damage our flexible labour market than bring in a substantial amount of tax revenue, as many contractors will become less inclined to work in this way for a diminished income.
There is clearly a very strong case for a complete overhaul of IR35. By putting forward these suggestions, the Government has demonstrated a lack of understanding of the way that independent professionals work.
IPSE does not believe that IR35 can be meaningfully improved by tinkering around at the edges; the Government needs to be more radical in its approach to solving this problem. We continue to engage with key decision makers and we will be fully involved in the discussion on the future of IR35. It vital that Government listens to us and other business groups that understand what’s happening on the ground. If they don’t, the flexible labour market and the consequently, the competitiveness of the UK economy as a whole, could be damaged forever.
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