The UK's Tax Faculty has prepared a paper with contributions from the Chartered Institute of Taxation which calls the IR35 regime "fundamentally flawed" and says it should be replaced by means of a radical overhaul of the employment status rules.
IR35, which is much hated by the self-employed, was introduced in order to stop what the Treasury considered to be abuses of self-employment, in particular by employees who swapped employment for contract work which was essentially the same. But it has turned out to be a blunt instrument which is blamed for driving many self-employed professionals and contractors out of the country.
The paper says that if IR 35 was intended to raise revenue, then there are no figures to prove that it has been effective. The Budget 2004 Red Book at paragraph 5.95 states: ‘To ensure that targeted tax incentives support the Government’s objectives for growth, enterprise and productivity, the Government proposes to consider the issues raised by the interaction with the tax system of definitions of income of self-employment, and the remuneration paid to owner-managers, in a discussion paper which will be issued at the time of the 2004 Pre-Budget Report.’
The Tax Faculty's Tax Representation TAXREP 36/04, 'Small business issues - Paragraph 5.95 of the Budget 2004 Red Book' says that the lack of available data to support the Government's estimate of GBP900m at risk in the absence of the measures, and a similar lack of data on the administrative and employment costs arising from IR35 investigations, begged the question "whether the tax raised by IR35 has fallen far short of its intended target". It concludes that if the Government's policy aim of tackling the issue of disguised employment is to be achieved, the solution is a radical overhaul of the rules about who is employed and who is self employed.
The paper calls on the government to take a pragmatic view in forming tax policy for smaller tax enterprises such as husband and wife companies, and suggests the abolition of both the nil rate of corporation tax and the new 19% rate on distributed profits. The paper argues that the present differences between the tax treatment of incorporated and unincorporated businesses cause confusion for owner managers.
The report concludes: "We think that the issues that we have set out need to be considered further and that they should inform a meeting between tax representative bodies, business organisations and the Inland Revenue and other Government officials to discuss issues arising from paragraph 5.95."
The full text of Tax Faculty Representation 36/04 can be found in the Tax News Resources section.
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