Coalition Government to review IR35

The new coalition government has announced that they intend to review the controversial IR35 legislation which has been a lingering concern for IT contractors since it came into force in 2000. The pledge is made in a 34 page document which outlines the new government’s plans for the next 5 years.

The relevant extract on page 10, reads as follows:

"We will review IR35, as part of a wholesale review of all small business taxation, and seek to replace it with simpler measures that prevent tax avoidance but do not place undue administrative burdens or uncertainty on the self-employed, or restrict labour market flexibility".

The full document titled ‘The coalition, Our Programme for Government’ can be viewed via the following link http://www.cabinetoffice.gov.uk/media/409088/pfg_coalition.pdf

Although this is welcome news for IT contractors, we must remain cautious until after the review when further detailed information will be available as it is unlikely that the new government will want to drop a revenue generating income whilst facing such a large economic deficit.

Although HMRC alone is thought to only generate £1.5m per year from IR35 directly, the increased NI and tax generated via umbrella companies is more substantial and this combined with the costs of rule compliance make this income more significant.

IR35 was introduced to eliminate a loophole that allowed contractors to effectively work as full time employees for a business but to avoid paying tax and NI contributions as an employee. Individuals could provide their services through an intermediary company and, by taking payment by dividends from that company rather than salary, end up paying less to the tax authorities.

It is unlikely that we will see any changes before the emergency budget on the 22nd June, and in fact any new legislation is anticipated to come in with the new financial year. So, yet again we wait to see what our new government will decide, let’s hope it will be clear, concise, workable and an improvement on the unpopular IR35.

Emma Nicholson, Contracts Manager, Vector Resourcing