In the history of taxation, many laws have been repealed for either popular or practical reasons. In 1851 the daylight robbery of the window tax was smashed after 150 years, and in 1992 the deeply unpopular Community Charge, known as the poll tax, was replaced by the Council Tax.
So recent rumours of the death of IR35 could hardly be surprising, given the irritation the tax has caused to so many small businesses and the difficulty HMRC has had in claiming anybody came under the jurisdiction in the first place.
Since its inception in 1999, the Intermediaries Legislation, known as IR35, has been a constant thorn in the side of UK freelancers, causing contract rewrites, a massive growth in Umbrella companies, more money for accountants, and fears that the taxman would soon be knocking.
"IR35 was just another worry after the dot com crash," says Robert Wallace, a freelance software developer. "If it wasn't annoying enough that work became thin on the ground and rates plummeted, the Revenue told me I was not running a proper business."
But proving what was and what was not a proper business turned out to be extremely difficult.
Of the 1254 investigations handled by the five specialist tax advice firms supplying the Professional Contractors Group (PCG), only three resulted in money being owed to HMRC.
"IR35 is so awkward and complicated that even HMRC cannot understand how it works," says Jon Kell of the PCG.
He explains how the Revenue is not supposed to dip into people's affairs at random, and yet this success rate, based on cases the taxman must have thought were sound, suggests HMRC consistently failed to understand the law. And more worryingly, the authority seemed unable to re-interpret the law after each investigation fell apart.
It's an opinion supported by Simon Dolan, managing director of chartered accountants, SJD Accountancy.
"It's an extremely bad piece of legislation, so open to interpretation because it's based on case law," says Dolan.
Out of the 300 IR35 enquiries SJD has been involved with; only one has resulted in monies owing.
But despite the embarrassing failure rate, HMRC will say only, "HMRC continues to address compliance issues arising from the Intermediaries Legislation. HMRC uses compliance resources to achieve maximum effectiveness, and has increased efficiency by getting more value from the resources deployed, and taking a risk-based approach."
When asked if taking a risk-based approach meant there would be less pursuit of IT freelancers – since experience shows such actions risk losing money in pointless investigations – a spokesperson said, "No, the quote means exactly what it says, and a risk -based approach is just one of a number of factors we are deploying such as improved use of our resources."
So there is no admission that IR35 is on the way out because it's unworkable, but in a plain-English translation there is, perhaps, the subtlest hint that compliance resources [tax collectors] have been deployed [moved] to achieve maximum effectiveness [by not attempting to enforce IR35].
It makes sense, of course, to admit nothing overtly. The last thing HMRC wants is all those IT contractors that have paid IR35 in good faith asking for their money back.
Nonetheless, acting upon hearsay is a risky business, and planning your tax strategy based on something overheard down the pub – or read in Private Eye – would be folly indeed, warns Roger Sinclair at IT law firm Egos Ltd.
"No wise freelance contractor should assume that IR35 is any less important or significant than it was yesterday...or last week...or last year...or 5 years ago. Don’t listen to rumours; they’re unlikely to be anything more than wishful thinking."
And with regard to the number or failed investigations, a HMRC spokesperson said, "It sounds very much like an inaccurate figure which is aired by others but neither confirmed or commented on by HMRC."
But Kell is adamant the PCG's figures are correct, and they, if anything, can demonstrate IR35's absurdity.
Perhaps the historical window of IR35 really is closing, it's doubtful anybody can say for certain. But just like the many unpopular, unworkable taxes before it, there is certain to be a replacement, and it could be worse for contractors if our honourable legislators create a law that actually makes sense.
William Knight
Sep 8, 2006
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