AccountingWEB’s IR35 Manifesto
As manifesto’s are currently topical, AccountingWeb, recently published its own IR35 manifesto. The document draws on an online survey carried out last autumn and also contributions from some of its 120,000 accountant readership.
Just over half the accountants who participated called for the abolition of the intermediaries legislation whilst others emphatically pointed towards the uncertainty IR35 creates and the additional financial burdens it places upon contractors. Interestingly, a good number of the professionals said that IR35 had restricted trade and actually put the brakes on some of their freelancer clients pursuing new business.
Further criticism was aimed at the quality, or lack of, of HMRC’s IR35 guidance, not only for contractors but also accountants and, if nothing else happens with the legislation in 2015, the message is clear that this must improve.
AccountingWEB would like the next government to carry out a proper impact assessment of removing IR35 together with its three other suggestions. As honourable an intention as this is, I doubt it will be high on the next government’s priority list unfortunately.
1. Income tax and NIC harmonisation
This is something that both the Office of Tax Simplification and the House of Lords Select Committee on PSCs have, in recent times, urged the government to consider. AccountingWeb calculate that, based on current tax rates, a basic rate taxpayer would pay 32% and higher rate payers 52%, of their earnings under a unified rate, although employers NIC would most likely remain unchanged.
Merging income tax and NIC does strike at the heart of the problem but it has been an idea that has been floated and considered for decades now and we seem to move no further on.
2. Legislating employment status
There are a good number of professionals and freelancers who believe that IR35 puts end users in a win-win situation and that this is unfair and imbalanced. The proposal here is therefore that a decisive criteria for employment could be enshrined in legislation therefore batting the risk back to the end client.
3. Subject dividends to NIC
This would, like the integration of tax and NIC, more readily eliminate the necessity for IR35. However this suggestion also proposes that dividends paid by a close company (five or fewer participators) be treated as a deemed salary and taxed accordingly rather than being subjected to the lower rates for dividends as is currently the case.
If nothing else comes of this manifesto other than stimulate and re-energize the debate within the political arena, then AccountingWeb are to be commended.
With regards to dividends treated as salary and subjected to tax and NICs, it would appear that a view is being taken that all contractors are effectively employed by the end client and therfore should be compensated as if a salaried employee.
How would this work when fixed price work packages are entered into whereby the contractor may make a loss or a profit. This surely is the essence of what being in business on one’s own account is about and discriminates against small one man band companies.
These measures would make it easier for a government and HMRC to target tax policies at contractors. Moreover, if a contractor has to pay NI on dividends, what is the point of being a contractor as he/she would be tax-wise no different that a permanent employee on PAYE.
What AccountingWeb and all these other organisations are missing is that the world of work from the 1970s to now has changed: it is no longer simply employer/employee; there is a whole new work relationships that did not exist before, and to lump everyone as PAYE is not recognising the change, and is certainly not a solution.