IR35 – is the end in sight?

November 16, 2015

• IR35 was introduced in 2000 and recently there have been 4 reviews of the existing legislation.
• The government must make a difficult choice between a competitive environment, where use of contractors is encouraged (IR 35 less onerous) or balancing the budget (more contractors caught by IR35)
• 2 options are recommended by The Institute of Chartered Accountants (1) identifying a rule for certain contracts (proposing those over 6 months) that fall into IR35, (2) HMRC administering a certification system for contractors similar to that of subcontractors

The IR35 legislation came into force in the 2000 Finance Bill and has remained controversial ever since.

HMRC continues to look at ways to improve the effectiveness of IR35, against a background of views that there is wide-spread non-compliance with the legislation.

In spite of numerous reviews (4 to be exact) involving the House of Lords Select Committee, the Office of Tax Simplification (OTS) and well as HMRC, the area remains complex and achieving certainty requires a difficult choice by the Government.

Do they focus on balancing the budget (change IR35 to mean more contractors fall into the net) or ensure they continue to provide a competitive business environment, particularly in the financial services industry where the use of contractors is widespread and provides flexibility?

The Institute of Chartered Accountants (ICAS) of which Lothian Accounting is a member supports the OTS recommendation to suspend the IR35 legislation for a limited time in order to consider other options.

What are these options?

1. Contracts should be time-based so that contracts extending beyond a particular duration (6 months is recommended) would be treated as contracts for employment. There would be legislation in place to prevent the use of a series of short term contracts if these are with the same client and at the same location.
2. HMRC should introduce a certification system for contractors which is similar to the Construction Industry Scheme. Contractors would need to obtain a certificate from HMRC to demonstrate that they can be paid gross for their services, otherwise the client would deduct income tax and national insurance. This would be extra administration for both HMRC and contractors.

Unfortunately there is still no certainty for contractors or clients and so the problem with defining contractor limited companies that fall under IR35 rumbles on.

If you would like to talk more about proposed changes to IR35 legislation or how this could affect your company,  please call or drop me an email.