Four fundamentals lost in the IR35 debate

1. How we got where we are

In the passage of time contractors may have forgot, but the Office of Tax Simplification  put forward to the government two lead options - suspend IR35 pending any acceptance of the merger of income tax and NIC - keep IR35 and improve its administration.

Only if these two options were not accepted did the OTS recommend consideration of a third option, the business tests. It stated “If this policy is considered, the evaluation of fiscal risk will depend on the difficulty of the test and could result in the removal of too many individuals from IR35 as the experience from Australia shows. The OTS recommends rigorous analysis and consultation on the criteria to be used in a possible test prior to implementation.”

The OTS report also noted that it “received views from some of our Consultative Committee in support of this option and some very strong views against, on the basis that it adds another layer of complexity.” In the end, the government chose to keep IR35.

2. Business test is not set in stone

Some advisors, and no doubt contractors too, have made clear that they are pleased that both the scenarios and the tests are “not set in stone.” Some leading groups who are on the forum have criticised the tests. Outside the forum, other experts on IR35, such as Accountax and the Law Place, have also expressed concerns.

3. HMRC consulted far and wide

At the same time, there have been claims that senior ministers support the business tests, though these are yet to be substantiated. Contractors might be interested to know that HMRC has been consulting on this issue far and wide. So although contractors might want the opposite, it’s not just about what the forum members have to say. HMRC has involved everyone who has either expressed an interest or directly approached those it considers important in the industry for their views. 

4. Low risk doesn’t equal 'no difference'

Contractors should note that it is not right to believe that being categorised ‘low risk’ by HMRC makes no difference whatsoever. However, it is my professional belief that it makes no difference for the need for them to consider their IR35 status for each and every contract they undertake. Yes, if an individual can prove they are low risk they will be left alone for three years (under the new HMRC guidance). But contractors should beware, as HMRC’s guidance also states “If you are in the ‘low risk’ band, you may happen to enter into an engagement which is within IR35. If so, your intermediary must apply the IR35 rules to the income from that engagement”.

Based on exclusive comments to CUK from IR35 specialist Kate Cottrell.