One of the major issues influencing whether prospective contractors chose to operate through umbrella companies or their own limited companies is the thorny issue of IR35 legislation. Introduced by the previous Labour administration in 1999, it was created in an attempt to prevent tax avoidance. In reality, because of the complex and ambiguous ways in which the distinction between employed and self-employed statuses are cast in the legislation, many freelancers have been subject to distressing and time-consuming IR35 investigations by HMRC, with the prospect of facing heavy penalties if deemed to be in disguised employment.
PAYE umbrella contractors have largely been spared these ordeals, with their status clear and their tax calculations handled by the agency. As is well known, however, the Office of Tax Simplification (OTS) was set up by the incoming Coalition government last year to consider reform of all areas of tax pertaining to UK businesses. Reform of IR35 was, from the outset, one of its principal targets.
OTS Director John Whiting has just announced that his organisation will provide a report on its review of UK taxation ahead of the March 23rd Budget. However, he warned that contractors seeking an immediate reform of IR35 will need to be patient – proposals for a successor to the widely disliked legislation will need “bottoming out” time after the budget to assess their implications.
The OTS final report is due in the summer, and Mr Whiting was clear that he wishes to come up with true improvements by then on what is broadly considered to be an excessively burdensome regime.