IR35 - Why it should stay

Following on from last week's article explaining the arguments in favour of killing IR35, we now examine the case for retaining IR35 in its present form, while remembering that the chief executioner is sharpening his axe as we speak. Following the coalition government's recent announcement that they are seeking to review and replace IR35, many may be expecting a pronouncement in the Budget on Tuesday. It maybe, however, that the Great Reformation may not be heralded in until the autumn Pre-Budget and not enacted until April of next year, but we shall see.

New evidence why IR35 should go

Before we move to the challenging task of defending IR35, a release of official figures has made such a task even more difficult. IR35 may have been proverbial pain in the rear for all those affected by this tax avoidance legislation, but the fact is that over the last 10 years, in terms of swelling the Treasury coffers, it has failed miserably. It took a while to prise the statistics out of HM Revenue & Customs; presumably because they felt so embarrassed! We were finally told that during the period 6th April 2002 – 5th April 2008, IR35 contributed a mere £9.2m to the pot. This is the gross figure, so it may be fair to assume that if we knew the associated costs of the Revenue's time and manpower devoted to policing the legislation, then IR35 would be in the red.

Freelancers know their enemy

For those contractors that were forced to stand and deliver, the statistics will be scant consolation. However they do reveal that the majority of freelancers have either successfully rebuffed the unwanted attentions of HMRC or not been caught in the headlights at all. The latter, however, would probably depend on the length of time spent contracting.

Possibly the primary reasons for IR35's failure are twofold. Firstly, IR35 enquiries are time-consuming by their very nature and can stretch out over years - take the recent case of Novasoft for example. HMRC simply do not have the resources to take up vast numbers for enquiry as the enquiries they do get involved with both strain and exhaust their manpower.

Secondly, over the course of time, freelancers have become an educated community. They have banded together in groups, such as the PCG, enabling them to speak out as one powerful voice. The likes of CUK and Qdos have also provided contractors with the necessary weapons to take up arms against a common foe; information, a platform to share information, tax fee protection and IR35 insurances, contract review services and so on. Gone, or less likely to see, are the days of a contractor being naïve, which accounted for HMRC's successes in the early years of IR35. They are savvy and empowered to take on IR35 head on. They know their enemy.

Better the devil you know

IR35 is far from ideal. It's a nuisance that causes contractors to expend a few hundreds of pounds each year on contract reviews and insurances that could be better applied elsewhere. It won't go away, however, as some form of tax avoidance legislation needs to be in place to prevent the scenario that it was originally drafted to counter. Furthermore, the coalition government have confirmed it won't be scrapped but rather revamped. The question on every freelancer's lips is, 'what will the spawn of IR35 look like?' Many have an opinion but nobody knows for sure.

'False self-employment'

The government has said it wants to make IR35 simpler and give the self-employed certainty, but led by the need to prevent tax avoidance. Maybe the blueprint for this already exists in the form of HMRC's proposals for 'False self-employment in the construction industry'? Under such a framework, workers would only be considered to be self-employed if they met one of three criteria:

• A person provides the plant and equipment for the piece of work they have been asked to carry out excluding normal traditional tools of the trade;

• All materials required to complete the work are provided by the worker; or

• The person uses other workers to carry out the work and is responsible for paying them.

Given the Treasury and HMRC's legislative track record over recent years, it is quite feasible that this framework could be tailored to the freelancer sector. For instance, the materials test could be replaced with, say, a turnover test. Whilst it would make the employment status test simpler it would also narrow the parameters and opportunities to be genuinely self-employed, which would result in a number of contracting casualties. Just like the impact caused by the MSC legislation in 2007, many contractors could fall out of the freelance sector without HMRC having to lift a finger.

As with any new legislation, there will of course be those who will seek to circumvent the rules by legitimately exploring opportunities to retain their self-employed status, though this will still come at a cost.

So whilst IR35 is imperfect, the alternative may be much harsher and come with severe consequences. It could be a case of turkeys voting for Christmas.

Your verdict?

Members of the freelance jury, you have now heard the cases for the prosecution and defence of IR35. You can now decide if you agree with the reformation of IR35 or whether, given the evidence put before you, you would prefer it to have remained unsullied. Presiding Judge, George Osborne, will pass sentence on Tuesday, 22nd June.

Seb Maley, freelancer services manager at Qdos Consulting Limited.