How to solve a problem like IR35……

It was announced in the IR35 Discussion Document that IR35 was not going to be abolished, but it very clearly stated that IR35 is ineffective and that non-compliance is widespread. Which therefore begs the question – what do we do with it?

The time for official discussion has now closed, as of 30^th September and all those who which to have their voices heard will now have forwarded their opinions to HMRC for their perusal.

It seems impossible to come up with a simple solution. IR35 is one of the most complex pieces of tax legislation and there have been several attempts at trying to simplify the legislation. One of the most controversial options suggested was to align the status tests with the recently revised Agency Legislation and to focus solely on supervision, direction and control, or to use the length of an engagement as a more determinative factor, both of which seem unduly restrictive and impractical.

However the document did mention something which could help to make the legislation more straightforward to comply with, which is that end clients take more of an active role.

One of the biggest challenges faced when defending IR35 enquiries is the viewpoint of the end client. HMRC will always want to seek to contact the end client in an IR35 enquiry to determine the contractor’s true working arrangements. The problem tends to arise when HMRC approach the end client, who may have little or no knowledge of the way in which the contractor provides their services or the basis upon which they were engaged.

Whilst most contractors will do their utmost to ensure that their end client is on the same page from a status perspective, many clients can be reluctant to enter into IR35 related discussions because ultimately IR35 is not their problem. It seems that for too long clients have been able to wash their hands of the status issue and there should be more transparency between the parties. The intention should be made clear right from the outset. If a client engages an independent supplier of services who is operating a genuine business, that business should be treated as such.

What can also throw a spanner in the works is the upper level contract between the agency and end client.  As a contractor the likelihood is that you will never see this document. Despite this HMRC will often request it as part of the evidence required and will use it in their defence. Whilst you would expect this agreement to mirror the terms of your contract with the agency, very often it doesn’t and it can contain some nasty surprises.

In our experience where a contractor has the support of their end client, complying with IR35 and defending IR35 enquiries becomes much more straightforward, so this could be a move in the right direction and we have expressed such thoughts in our own response to the discussion document.

The end client’s involvement should however be limited, and what we would not want to see is the end client being able to deduct tax and NICs. It’s unlikely that many clients would want this level of responsibility and a contractor should be responsible for paying its own taxes – it being a business after all.

With the Autumn Statement on 25^th November fairly close to the Christmas season we remain optimistic with the hope that placing some responsibility on the end user will bring about greater clarity and understanding between the parties and will therefore be an improvement on the current system. Whatever happens we will of course be prepared to help our clients with whatever lies ahead.