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By James Brooks
For those self-employed professionals who work on a freelance or contract basis, the IR35 rules have perhaps been a thorn in their side, complicating the landscape and making operating as a self-employed person less rewarding and more protracted than it might otherwise have been. To understand the legislation fully it makes sense to employ the services of a good local accountant who will not only make sure rules are complied with but also ensure taxation is applied fairly without overpayment.
When it was introduced as new legislation in 2000, the IR35 tax legislation was aimed at sealing a tax loophole or situation where contractors were able to pay less income tax and national insurance contributions than employed colleagues who were performing the same role. There were stories of staff being able to resign from full-time employment one day and return to work the next day as a freelance contractor earning much more money. Of course that was an over-simplified situation as the differences between freelance or contract arrangements and full-time staff roles are many, but it was the one used by the Treasury to justify the introduction of the system.
Now eleven years on the usefulness of the IR35 rules are being reviewed and there are at least two organisations suggesting IR35 should be suspended and then abolished. Shortly after David Cameron became Prime Minister in 2010, his government set up a new body to look into making the system of UK taxation more efficient. The Office of Tax Simplification (OTS) has recently been looking at IR35. This examination of the IR35 system is part of a wider review that the OTS is carrying out, looking at the way the current tax system causes complexity and uncertainty for small businesses. The organisation has produced an interim report to recommend priority areas for simplification. This review is important because the success of small businesses is vital to the economy and, as the recent OTS report confirms, 95% of UK businesses have fewer than 10 employees.
One group that welcomes the review of IR35 is the Professional Contractors Group (PCG), an organisation that was set up in advance of the introduction of IR35 back in 1999. Its original aim was to protest against the rules but despite a vocal campaign the IR35 legislation was introduced in April 2000. The PRC then took HMRC to a judicial review in March 2001, but the case was dismissed. Since that time the PRC has continued to exist and assist in IR35 case appeals and campaign for freelance workers on other matters.
The PRC recently gave its support to the review being carried out by the OTS and suggested that the latest release of the OTS report is effectively making a case for abolishing IR35 completely. Whether that happens remains to be seen, but it is clear that the current system is both difficult to administrate and does not raise the tax revenues many claimed it would prior to its introduction. The PRC claims figures of around 1.5 million pounds annually compared to the 200 million originally predicted.
The OTS review is also considering other structural changes to the tax system that could be introduced quickly to help small businesses. These include improved HMRC administration systems, simpler reporting requirements for expenses and employee benefits, simpler VAT systems for small businesses which trade internationally and improved capital allowances rules.
Helping self-employed individuals understand and work with IR35 rules is just one area where it makes sense to work with a local accountant who is familiar with assisting small businesses. Other areas where accountancy help is important for small businesses include VAT schemes, regulatory company filings, cash flow planning, accounting procedures and calculation of dividends.
About the Author: Working for an
accountants in Alton
Hampshire, James creates useful guides and information reviews for small business owners. He also covers personal taxation, bookkeeping and accountancy for non-profit organisations.