First details of IR35 consultation published

Tuesday 21 July 2015

Her Majesty’s Revenue and Customs (HMRC) has released the initial documents relating to its planned reforms of intermediaries taxation, such as contractors setting up a limited company to take advantage of tax rates. This is part of an initial consultation on the topic that will run until September 30th.

This is because a substantial part of a contractor’s income can be paid as a dividend, rather than as a taxed salary, along with reduced rates of National Insurance contributions (NICs).

Contractors have already seen that dividends paid through limited companies will soon be taxed at 7.5 per cent, as opposed to the current zero rate available to Personal Service Companies (PSCs). A new tax-free allowance for dividends will be introduced, but will only extend to the first £5,000 earned in this way.

While more details of the planned changes will emerge once responses to the public consultation are published in September, HMRC is keen to reassure contractors that operating through a limited company will continue to be subject to a lower tax rate than other self-employed individuals such as sole traders.

It claims its aim is to tackle “the unfair manipulation of the rules” that led to the establishment of the IR35 system in the first place, rather than to penalise the self-employed. However, HMRC also acknowledges that despite its efforts to prioritise IR35 investigations and interventions on the basis of risk, the process remains “complex and time consuming”.

The chancellor George Osborne explained that the changes to dividend taxation were designed to allow him to lower corporation tax. This rate is set to fall over the current Parliament, dropping to 19 per cent from April 2016, then to 18 per cent in April 2020.

Discussing the rationale behind the new rate of tax, and justifying his approach to business taxes, Mr Osborne said: “We can’t take [corporation tax] lower than that while such strong incentives are created for people to self-incorporate and pay the lower rates of tax due on dividends.”

The proposed changes centre around the tests that determine whether IR35 should be operated, along with potential tightening of other regulations meant to prevent disguised self-employment.

Possible changes could include a shift in responsibilities, as the current situation places the obligation to apply IR35 on the PSCs and is operated independently for each contract. This means that HMRC has to make individual enquiries for every contract entered into by a PSC, even throughout a complex supply chain.

The situation has been growing since the legislation was introduced in 2000, as the number of PSCs operating under IR35 has remained consistently small ever since.
Whatever the suggestions to resolve the current problems, HMRC referenced the reports published last year by both the Office of Tax Simplification and the House of Lords Select Committee into Personal Service Companies, which found “no easy answers” to the challenges of IR35 reform. It seems likely that any attempts at reform will progress slowly, which will be a relief to contractors hoping to minimise confusion while complying.

By Victoria McDonnell

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