Ever since its announcement in the 1999 budget by the then Chancellor of the Exchequer, Gordon Brown, IR35 has been a thorn in the side of anyone choosing to work through their own limited (Ltd) company. But now, in 2013, its abolition seems further away than ever – so will it ever be abolished?
Of course, that’s an impossible question to answer – if I could answer it with absolute certainty then that would require me being able to see into the future, which I can’t. However, we can look at what has happened with regard to IR35 over the past 13 years or so, and where the legislation is today, to at least make an informed opinion of how things might develop with regard to IR35 over the coming years.
As an IT contractor I have been interested in IR35 ever since I first heard about it in 2000. I was working in France at the time and was thinking about coming back to the UK. One of my fellow contractors at the time said to me that I should reconsider because the UK government had just introduced something that meant that contractors suddenly had to start paying a lot more tax than they used to. I brushed off her comments though, thinking that surely ‘this thing’ couldn’t be all that bad … how wrong I was!
I returned to the UK in December 2000, and started a new contract in January 2001. My accountant at the time advised me to start paying IR35 taxes because, in his opinion, I was ‘caught’ by the legislation. This of course, has always been one of the main problems with IR35 – it is down to someone’s opinion as to whether one is caught or not. So, anyway, I started paying the additional tax and National Insurance (NI) that working within IR35 demanded … and oh boy … how painful was that!
Have effectively ignored the advice I was given by a fellow contractor whilst still in France, I was now paying the price for that ignorance … in cold, hard cash. IR35 had got my attention!
One of the arguments in favour of IR35 when it was announced and subsequently introduced was that a contractor (working through his/her own limited company) earning, say, £100,000 per year should pay the same amount of tax and NI as a ‘normal’ employee of a company earning the same amount. However, this turned out to be not quite true, primarily because of the Employers NI that you have to pay if you are paying yourself through your own company, as well as the accountancy and insurance fees that you have to pay as a contractor, which mean that you end up paying more than you do as an employee of someone else’s company. OK, there is the 5% allowance that you get as a contractor, which is supposed to make things ‘fair’, but it doesn’t go anywhere near far enough (in my opinion).
In the previous sentence I mentioned the word ‘fair’, which is a word that has real significance when discussing IR35. Is the additional financial burden that IR35 puts on those that are caught by it, fair? If you are a tax inspector or the Chancellor of the Exchequer you would probably say ‘yes’, but if you are a contractor paying additional taxes you would probably say ‘no’ … it’s all a matter of opinion.
So Where Are We Now?
So, in November 2013, what is the current state of play? IR35 has had a long time to mature now, so are things any better or clearer than they were, say, ten years ago? From a contractor’s perspective I would have to say ‘no’. The threat of an IR35-related investigation from HMRC is something that contractors have had to learn to live with. There have, over the years, been various glimmers of hope that IR35 would be abolished, but ultimately it’s still there on the statute books.
So have there been any winners? Yes, loads of them. A whole industry has grown up on the back of IR35 – from tax advisers to companies selling text insurance – a lot of people have made a lot of money out of IR35. How much actual tax revenue has been raised by HMRC is debatable, but it certainly doesn’t look as though IR35 will be going away anytime soon.
For many years, the Liberal Democrats and the Conservatives expressed their disapproval of IR35 and at times have stated that the legislation would be abolished if they (either of them) ever came to power. Well, as we all know, in 2010, the new UK government was formed by a coalition of the Conservatives and the Lib Dems. For many contractors, this was what we had been waiting for for years – surely this would signal the end of IR35? … but alas, that was not to be.
The coalition did carry out a review of IR35, but the outcome was the disappointing decision (again, from a contractor’s point of view) that the legislation should stay in place. George Osborne – the Chancellor of the Exchequer – stated that to abolish IR35 would effectively open the floodgates to incorporation, with loads of new limited companies being set up simply to reduce tax bills. IR35 would, therefore, stay in place as a deterrent and thus maintain tax revenues at least at their current levels. I imagine that for the industry that has grown up around IR35, this was a good outcome, although no-one from that industry would ever admit that.
So What Does the Future Hold?
This, of course, is a tricky one and is down to pure speculation – my opinion is no better or worse than anyone else’s. Personally, I think that IR35 is here to stay – all of the three major political parties in the UK have had a chance to get rid of the legislation, or at least influence its survival, and it is still well and truly with us. I can’t see any advantage to any political party in abolishing IR35 anymore.
So where will we be in, say, 20 years’ time? I think the industry that surrounds IR35 will still be around, making huge sums of money from it. I think that some contractors will play it safe and pay IR35 taxes, and some will endeavour to avoid paying the taxes and potentially build up a large tax liability – as is the case today. At the end of the day, it’s all down to probability as to whether you will be investigated or not, and whether or not you will end up paying out a big lump of tax as a result. As a contractor you have to weigh up the odds and make a decision as to whether or not you will bow down and accept the legislation that was introduced by Gordon Brown all those years ago.