IR35 to be abolished - Beware son of IR35

The small business minister Mark Prisk is quoted as saying:

"We want to make sure that we could undertake a comprehensive review of small business taxation in a way that makes the need for the current IR35 legislation redundant,"

This follows on from the statement in the June Budget Red Book that the Coalition Government:

"remains committed to a review of IR35 and small business tax," and plans to "release further details shortly."

As I repeatedly tell accountants: Be careful what you wish for. Of course IR35 needs to go. BUT it will be replaced by "son of IR35" as part of the wider review of small business taxation. Related discussions have been ongoing for 2+ years as between ministers, shadow ministers (as were), Treasury, HMRC and the professional bodies.

The change of Government makes it easier to junk the rules that emanated from IR35. Many of those who comment on this subject however look at it only from one perspective. That of the genuine freelance contractor. The review however will inevitably also want to influence the following :

• The reluctance of some employers to take on more employees - perhaps due to recruitment restraints. So instead they only want to use freelancers;
• The preference of some employers to use freelancers (rather than employees) so that they can avoid responsibility for employers' NICs and employment regulations. Stories abound of unscrupulous employers sacking staff and then letting them continue working on similar terms. The difference being that the 'staff' have to supply their services through personal service companies;
• The fact that many self employed contractors only set up a personal service company in order to pay less tax than they would do if they continued to operate on a self employed basis; Others become aware of this opportunity after being persuaded to set up a company at the request of their 'employer';
  
• The insistence by some 'employers' that even genuine freelance contractors must provide their services via a personal service company. This approach means the 'employer' can never become liable for employers' NICs or PAYE no matter how aggressive HMRC argue the case. It also means that the 'risk' of a successful HMRC challenge moves from the employer to the personal service company (due to the IR 35 rules as they currently stand);
  
• 21st century working arrangements. The fact that someone has notified HMRC that they are self employed does not prevent them from also having a part time job as an employee. Equally a freelance contractor who normally works on a self employed basis could occasionally provide their services on terms that make them an employee (either on a full time or part time basis).
  

The Government will also want to ensure that:

• unscrupulous employers cannot evade their responsibilities and obligations under employment law and PAYE;
• contractors who choose to provide their services on a self employed basis are not motivated to do so through tax advantaged personal service companies. It is this latter 'abuse' that IR35 originally sought to prevent. And the announced tax changes from April 2011 again make this attractive from a tax planning perspective; and that
• genuinely self employed contractors do NOT become liable for the same tax as employees. This would be very unfair as contractors have no protection under employment laws and are not able to build up a contribution record for earnings related benefits.
  

Bottom line. We can reasonably expect the rules that emanated from the 35th Inland Revenue press release on Budget day 1999 (known as IR35) to be abolished. BUT there will be new rules to prevent undue tax avoidance. If the Coalition Government keep their promise of a new approach to tax policy making, we can expect to see a consultation over any specific new rules before they become law.