HMRC has released an Intermediaries Legislation discussion document outlining a framework for discussions with businesses on how to improve the effectiveness of IR35. The document covers a rationale for change, options to improve rules and the steps required for reform.
The document reveals agreement that legislation introduced back in 2000 “to tackle the avoidance of employment taxes by those who work through intermediaries” is not working effectively, as two workers in similar circumstances could be paying vastly differently levels of tax.
Non-compliance is also “significant” under the currently rules and only a “small number” of those working through intermediaries ‒ usually their own company, which is considered a personal service company (PSC) ‒ are compliant. There were 265,000 PSCs during the 2012/13 financial year – a 65,000 year-on-year increase.
The government has now asked HMRC to overhaul IR35, as non-compliance with the current legislation is set to cost the Exchequer £430m in NIC and tax this year and this figure is expected to increase if changes are not made.
The government wants to tackle disguised employment by “levelling the playing field between those who are employed directly and those who would be employed directly if they were not operating through their own company.”
Potential options include improving the administrative approach to IR35 and HMRC’s compliance response, though neither would be entirely sufficient. An alternative method would place more responsibility with the engagers, meaning that they would determine whether the right amount of employment tax is paid.
The government is now welcoming evidence and views about potential reform options with a view to developing a better understanding of the issues.
If you would like to read the discussion document, click here.