The Office of Tax Simplification’s Small Business Tax Review is published today and contains two key recommendations for reform, which have relevance for contractors working for either umbrella companies or limited companies.

Acknowledging that IR35 legislation proved to be the “thorniest issue” raised by small business representatives across the UK during the OTS roadshows, the review also notes that “no one method of reform currently commands universal support.” Outright abolition would also require “underpinning by a much better quality of data than presently seems to be available.”

The two central pillars of the review are structural reform of the current tax system by integrating National Insurance Contributions and Income Tax, and the introduction of a radical new approach to taxation for the smallest unincorporated businesses.

Prior to structural reform of taxation, which the OTS believes will remove the need for IR35, the review recommends two alternative approaches: suspending the legislation with a view to permanent abolition (using the suspension period to investigate behaviours and costs) and preserving it unchanged but improving its administration by HMRC.  But there is also a third alternative, which may interest the Chancellor – the introduction of a new “business test” aimed at radically reducing the size of the population currently caught by IR35 legislation. The effect would be to exempt large numbers of individual contractors from the worry of an IR35 investigation.

Other areas for reform include simplifying the VAT system for small businesses undertaking international activities, improving the capital allowances regime and improving HMRC administration.

We’ll bring further details of the review in subsequent news reports.

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