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UK Government Blasted Over IR35 Proposals

by Robert Lee,, London

14 May 2012

HMRC has missed a great opportunity to bring clarity, transparency and fairness in dealing with the intermediaries legislation commonly referred to as IR35, according to members of the freelance community who were invited on to the Treasury forum to discus the issue.

A number of bodies representing small businesses, the recruitment sector, freelance services sector and freelancers claim the new IR35 Guidance published last week fails to take into account key elements of their advice.

New HMRC guidelines on disguised employment, delayed from the initial planned commencement date of April 6, were finally published on May 9.

The guidance is set to be accompanied by a new test which will categorize contractors into 'High risk', 'Medium risk' and 'Low risk' in terms of their exposure to the IR35 rules.

Twelve online questions will be used to determine this status, looking at issues such as whether the freelancer has their own business premises, whether they are obliged to protect themselves with professional indemnity insurance, whether they are able to increase their business income by working more efficiently, whether they employ people to assist them, whether they would be liable to correct any mistakes made on a project at their own expense, and whether they have a separate bank account for business cashflow and expenses.

Other key indicators, including the ability of the contractor to send a substitute to work in their place, and advertising and other expenses incurred by the freelancer will be taken into account under the new scoring system.

The new tools are being trialled, and will not immediately replace the IR35 scenarios currently given by HMRC as guidelines for freelancers to determine if they are effectively disguised employees of their client.

Last year, a forum was set up to explore new approaches to the way IR35 is administered and monitor progress, consisting of representatives from HMRC, industry organizations and independent tax experts. However, the business representatives on the forum are united in their concern that the measures suggested in the HMRC report will not go far enough and will not reflect the new approach promised by the government at the 2011 Budget.

While accepting new advances such as better guidance, more detailed scenarios, improved helpdesk, better trained teams and quicker decision making are positive steps forward, there is a strongly held view by some of the external bodies on the IR35 Forum that HMRC has missed an opportunity to introduce clarity and fairness when introducing ‘business entity tests.’

The group feels that the questions, the scoring and the proposed use of the business entity tests are counter-productive and represent greater complexity rather than a simplification of IR35 that had been the government’s goal. Ann Swain of the Association of Professional Staffing Companies said external forum members had, “worked really hard to come up with a new approach and had achieved positive progress in some areas” but, she added many felt exasperated by HMRC’s reluctance to listen to their advice concerning the new tests.

Chris Bryce, Chairman of the Professional Contractors Group (PCG) and IR35 Forum member backed this view saying: “HMRC’s new guidance demonstrates their fundamental lack of courage and commitment to improve the operation of IR35. While the external members of the Forum have worked tirelessly to develop innovative solutions, HMRC appear at this stage to have opted for a risk averse approach that will not deliver the improvements that are so clearly needed. ”

The main unrest from the Forum revolves around the proposed ‘business entity tests’, or more specifically, the scoring of the tests. Commenting on this issue Martin Hesketh, the Freelancer & Contractor Services Association’s representative on the Forum, said: “The proposed scoring system undermines the business entity tests altogether. It will push a disproportionate number of businesses into the high-risk category, and in so doing will prevent genuinely high-risk cases from being identified. An alternative scoring system, backed by a majority on the Forum, was suggested but to date those suggestions have been rejected by HMRC.”

The IR35 Forum will now monitor the impact of the new measures over the next 12 months in what HMRC have termed, ‘the test and learn phase’. However, over this period the business associations say that they will continue to challenge HMRC to adopt a more radical approach to the issue.

The IR35 legislation was introduced in April, 2000, and was designed to combat the avoidance of tax and national insurance contributions through the use of intermediaries in circumstances where an individual would otherwise, for tax purposes, be regarded as an employee of the client.

However, it was revealed last year that the tax yield generated through IR35 reviews in 2010 was just GBP200,000 (USD320,000). John Brazier, Managing Director of the PCG said at the time that: “These figures confirm what PCG has always said, that the tax yield from IR35 is minimal and that the stress and damage done to the UK’s 1.4 million genuine freelance businesses is completely unnecessary."

TAGS: individuals | tax | small business | business | law | individuals in business | entrepreneurs | employees | contractors | professionals | self-employment | legislation

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