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CIOT Recommends New Approach On IR35 Compliance

by Robert Lee,, London

26 October 2015

The Chartered Institute of Taxation has recommended a new approach to tackling non-compliance with the UK's IR35 income tax and National Insurance contributions legislation.

IR35 is the income tax and NICs legislation that may apply if someone is working for an organization through an intermediary, typically a Personal Service Company (PSC). If IR35 applies, all payments to an intermediary are treated as if they were the worker's employment income and the intermediary must pay any tax and NICs due. The aim is to ensure that a similar amount of tax and NICs is paid as if the worker had been directly employed by an organization instead of an intermediary.

The Government estimates that non-compliance with IR35 this financial year will cost the Exchequer around GBP430m (USD659.1m) in lost tax and NICs.

In a recent discussion document, HM Revenue and Customs (HMRC) suggested transferring the IR35 compliance obligation from the worker and their PSC to the organization that they are physically working for. The CIOT said that this will neither simplify administration nor reduce non-compliance. It is concerned that these organizations will err on the side of caution and deduct tax and NICs, "leaving it to the worker and HMRC to sort out the mess."

HMRC has also mooted replacing the existing IR35 test with a "Supervision, Direction, or Control" test. The CIOT warned that a broad-brush IR35 test could catch many who are genuinely in business for themselves and would currently pass the hypothetical employment test.

The CIOT has recommended that HMRC instead impose an annual reporting obligation on organizations that engage with such workers, based on the PSC notifying them whether or not it considers that IR35 applies. There should also be an obligation for the PSC to notify that organization that it is required to apply IR35.

The organization would have to report what it had been told by the PSC and whether or not it agreed with the decision. According to the CIOT, if the organization was to willfully mislead HMRC that IR35 does not apply, any debt owed by the PSC in relation to this non-compliance would fall back to the organization concerned.

Colin Ben-Nathan, Chairman of the CIOT's Employment Taxes Sub-Committee, said: "It is clearly wrong that some people get away without paying the correct amount of tax and NICs because they are playing fast and loose with IR35 either through ignorance of the rules or deliberate non-compliance. In our view HMRC needs to give greater publicity to their successes in IR35 cases to increase awareness of the rules and where they suspect outright evasion then clearly they should come down hard on those involved."

"We strongly recommend that the annual reporting option we propose is seriously explored by HMRC rather than imposing an obligation on businesses to account for tax and NICs at source on payments to PSCs as put forward in the discussion document."

TAGS: compliance | tax | business | tax compliance | tax avoidance | United Kingdom | tax authority | legislation | social security | HM Revenue and Customs (HMRC) | trade association | HM Revenue and Customs (HMRC) | trade | individual income tax | Employment

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