Government decides to keep IR35 in place

In a blow to the IT contracting community, the chancellor has announced the government intends to keep IR35 in its current form because abolishing it would put tax revenues at risk.

In the full report of Budget 2011, George Osborne says IR35 will remain in force, following its review by the Office of Tax Simplification, but faces improvements to its administration.

These improvements will include the creation of an IR35 helpline staffed by HMRC “specialists” on the legislation, and an “IR35 Forum” to monitor the taxman’s new approach.

This approach, tabled as one of the improvements, will see HM Revenue & Customs publish guidance on ‘outside-IR35’ cases, so taxpayers can see how HMRC interprets the legislation.

The approach also includes the tax authority improving how it targets compliance activity on IR35, resulting in a commitment that IR35 reviews be restricted to “high risk” cases only.

Retaining IR35, but improving the way it is administered, was one course recommended to the government by the OTS, alongside a ‘business test’ alternative and scrapping it outright.

Buried in two small sections of the Big Red Book, the Treasury reflected on its choice: “The government has decided to retain IR35, as abolition would put substantial revenue at risk.”

More positively for IR35’s fiercest critics, Budget 2011 announces a consultation on aligning income tax with National Insurance – a move which would make the legislation obsolete.

Editor's note: More reading on the IR35 review here.