OTS employment status review tries to avoid IR35

Fears that a review into employment status by the Office of Tax Simplification would have a ‘knock-on effect’ on the IR35 legislation have been extinguished.

In fact, “almost all our recommendations are long term” so require “further work” pending “immediate reaction” at Budget 2015, wrote the OTS, which says IR35 was “strictly outside” its remit.

Despite this exclusion, the OTS mentions IR35 at least 45 times in its three-chapter report -- inevitable, it hints, because IR35 is the rule that applies employment status case law to the ubiquitous situation where an individual works via an intermediary.

The office explained that IR35 was excluded from its terms of reference though, because it has already looked at it, and because the PSC Committee and the IR35 Forum have looked at it too.

But the OTS relates one of its 28 recommendations to the rule.

“It would seem pertinent to explore if there is any synergy between the recommendations [of the IR35 Forum] for IR35 purposes and those of the OTS under this employment status review,” it said. 

Seeming aware that its remit restricts what it can explore and recommend, the office then admits that it is “difficult for us to say more on IR35,” except to “reiterate that it needs a solution”.

The OTS’s inability to delve further into IR35 is likely to please contractor accountancy firm Brookson, which hoped before the review that “potential change” to contracting’s legal landscape would not be recommended.

The opposite view, suggesting that the leash (and budget) that the office is on needs to be extended, was suggested this week by the Institute of Chartered Accountants in England & Wales.

The institute says the OTS has done some “good” work but believes the Treasury-backed unit has “suffered from a lack of resources, being asked to do too much with too little.”

As to ‘being asked to do too much,’ the office seems to agree. Its tax director John Whiting equates solving what his review calls the “unwieldy mess” of employment status with the impossible.

In the review’s foreword, he writes: “Employment status is a complex and wide-ranging subject that many have said has no real solution – and that if we did manage to ‘solve it’, we should immediately move on to world peace, as we’d clearly be on a roll.”

The review adds that while its initial intention was to provide some ‘quick wins’ on the subject, “almost all of our recommendations are long term in nature and will require a good deal of further work.” 

According to Mr Whiting, those recommendations can be divided into two groups: ‘direct’ as they tackle the definitions inherent in employment status, and ‘indirect,’ as they change tax or other rules to tackle status issues.

In the ‘direct’ category is a recommendation that four government departments (including HM Revenue & Customs) develop an agreed “code of principles” on employment status (ES).

Other direct recommendations include “better guidance” on ES for small businesses and individuals, improved guidance from HMRC; a remodelled Employment Status Indicator and possible development of a statutory employment test.

The IR35 Forum-related recommendation isn’t in the indirect category, but what is – and what could have a potentially bigger impact than any of the other recommendations – is a “full review” into the “taxation of small businesses.”

According to the OTS, such a review should be carried out to cover “limited companies, partnerships/LLPs, sole traders” and employee taxation.

It is not the only recommendation that contractors will think that they’ve heard before (- only last year, the House of Lords concluded a review into the tax consequences of personal service companies).

Indeed, sounding very similar to the recently axed IR35 Scenarios, the OTS says HMRC should provide “examples of common real life situations” showing how ES case law applies. An ES status phone-line (manned by HMRC) should accompany the examples to clear up people's queries.

The subject of another of OTS’s recommendations contractors have certainly heard before. In a section headed 'the Third Way,' the report explores the Freelancer Limited Company.

The office reflects: “There are a number of significant issues that would need to be considered in the development of this route. It would be as well to confirm that they would be solvable before starting out.”

Derek Kelly, the boss of accountancy firm ClearSky Contractor Accounting sounded relieved yesterday that the FLC was, in his words, “not endorsed” by the OTS.  

“[We’re] not hugely enthusiastic about the idea of creating a FLC structure”, the firm said, in line with its previous stance. “New thinking is great, but so are tried and tested solutions.”

Yet the FLC model does have “possibilities,” says the OTS, and so it will “not rule out returning to the idea” if some of the issues with the model can be ironed out.

“We are glad the OTS recognises the potential of this idea and we agree that it needs to be developed further,” reflected IPSE, the UK's contractor trade group.

“We have been working with…senior tax experts at the highest level to address the concerns the OTS raises in their report. We will supply the OTS with a comprehensive proposal at the earliest opportunity”.

But the clock’s ticking -- the office is due to close at the end of this parliament.

However, George Osborne may decide to put it on a permanent footing if the Tories win the May election.

The OTS confirmed: “We anticipate an immediate reaction in the coming Budget, but this [the OTS’s recommendations] is something that (together with the future of the OTS) will be in the in-trays of Treasury Ministers of the next government.”

The current government has been supportive of the office’s work. Ministers adopted one of its recommendations on IR35 from its Small Business Review and, at Autumn Statement 2014, accepted 51 of its 58 recommendations on UK tax administration.

As to its latest “project”, on employment status, the OTS reflected: “We have not found the tax equivalent of the philosopher’s stone that will suddenly transmute all the base problems into shining clarity.

“We have certainly proved there is a problem and set out why – and established that there is a real need to improve the situation.”

It added: “In the meantime, we encourage interested parties to let us know in the next few weeks what they think of our conclusions.”

Editor's Note: Related Reading -

OTS employment status review: key recommendations