Briefing paper shows IR35 has not progressed

House of Commons briefing paper on IR35 demonstrates we've moved no further since 2000

The House of Commons’ Briefing Paper on IR35 was released on 13 June by the House of Commons Library whose job it is to provide MPs and its staff with the briefing and evidence they need to support their parliamentary duties.

In considering the consultation document currently open on reforming IR35 in the private sector, it’s no surprise that a detailed briefing document on such a controversial piece of tax legislation would be required.

Debates regarding the misuse of Personal Service Companies (PSCs) began in the early 1980s and the Conservative Government at that time put forward proposals to legislate against this, but this was eventually withdrawn.

In the March 1999 Budget Paper, the Government announced that they would be introducing new rules regarding the tax treatment of individuals operating through PSCs: IR35.

The proposed approach was initially that employment status would be determined on the basis of whether the worker holds an office and/or whether the client exercises supervision, direction or control over the services. It was stated that the end client should not be required to check that any off-payroll workers were operating correctly and paying the right amount of tax because it would be “inappropriate and burdensome”, however, the end client would be required to check whether or not they were able to make gross payments using a ‘certification scheme’.

Prior to the legislation taking effect, over 1,700 written comments were put forward contesting the changes and the situation sparked considerable media attention which resulted in two main changes to the proposed legislation:

• The end client would not be responsible for ensuring that the IR35 rules were followed.
• The rules for checking employment would not be so tightly focused on control, although this would still be a key element.

Please see page 12 of the report for a list of the questions which were suggested to be used by PSCs to determine their employment status, many of which you’re likely to recognise from HMRC’s CEST tool.

HMRC unsurprisingly over-exaggerated the expected yield from the legislation to be in the region of £475million in 2000-01 and £375million in 2001-02.

Between 2000-2003, the trade association PCG (now IPSE) was granted permission by the High Court to proceed with a judicial review to consider whether IR35 was in breach of the Human Rights Act and European Laws. One of the PCG’s main arguments was that the change in legislation would cause a mass exodus of contractors leaving the UK to work overseas.

The PCG’s case was eventually dismissed. The Judge stated that; “[the PCG] makes a limited finding that some consultants may not continue to operate in the UK as a result of IR35.” The Judge was "just persuaded IR35 could be an impediment of mobility to consultants in the sense that a positive incentive for them to come or to stay may have been removed."

At the 10-year anniversary of IR35, HMRC once again became under pressure to reconsider the IR35 legislation with many claiming that the rules were simply a ‘sticking plaster’ with rules that lack any clarity.

In 2009 it was revealed via a Freedom of Information request that IR35 had raised just £9.2million between the tax years 2002/03 and 2007/08, a far cry from HMRC’s estimated £475million.

The briefing paper simply serves to demonstrate that despite IR35 initially being considered in the early 1980s and finally introduced in 2000, we’re still faced with exactly the same problems as contractors were faced with in the early days of IR35.

Making the end client responsible for determining the tax status of contractors who are themselves incorporated businesses is disastrous – end clients have never themselves had to consider IR35 and do not have the knowledge to make educated decisions regarding IR35 status, particularly with such flawed guidance which does not follow case law.

It has been highly publicised that the BBC and NHS have got it wrong so far in terms of determining the IR35 status of its workers, and for HMRC who wish to implement further IR35 reform in the private sector, this should serve as sufficient warning.

Opposition to IR35, prior to being included in Finance Bill 2000 but which still resonates today, was set out by Conservative MP, Richard Ottoway, who stated that:

“Contractors do not get such a good deal; they often do not receive such good benefits as the employed with whom they work…The legislation is muddled…It will not raise the Revenue that the Government hopes for. The Government should delay implementation to give them time to consider the damage they are causing…”