Osborne’s IR35 reforms deny freelancers of real change

A raft of mechanisms George Osborne promised yesterday to improve the way IR35 is administered will fail to visibly or tangibly effect how the legislation hangs over the typical freelance worker.

Declaring the status quo on IR35 as all but intact, most advisers to freelance contractors last night agreed that the impact of the chancellor’s “improvements” to simplify the complex rule would be only negligible.

“I don’t anticipate that our customers will notice any difference ‘on the ground’ in terms of the offered improvements to IR35,” said Martin Hesketh, managing director of Brookson, an accountancy firm for freelancers.

“Mainly, that’s because a freelance with us should have all the advice they need already. Like any other freelance worker in the market, as long as they take professional advice on IR35, it remains manageable.”

Pointing to the status and nature of the announced ways to improve IR35, SJD Accountancy says that for those who hoped an IR35 re-think could only ever conclude with root-and-branch reform, it’s a case of ‘as you were.’

“IR35 isn’t going to change in any respect whatsoever as far as I can see,” said the firm’s founder Simon Dolan. “I don’t think that the number of prosecutions the taxman brings will change, neither will enforcement of IR35.

“The coalition knows that IR35 is a mess but they also know that scrapping it means foregoing some much-needed income; small as it may be. So in effect, they’ve left IR35 alone but can still claim they’ve taken action – such as putting ‘experts’ on the end of an IR35 helpline.”

The chief author of the OTS’S review of IR35 - which called to retain the rule but improve it as one of three recommendations to Mr Osborne, is, perhaps understandably, more supportive of the chancellor’s chosen administrative improvements.

Kate Cottrell, a former Inland Revenue tax inspector argued: “Effective guidance and targeting of IR35 cases [by restricting reviews to ‘high risk’ cases] should give a level of clarity and certainty.”

But in line with the two freelancer accountants, she believes IR35 being kept in place, instead of being scrapped or added to with a ‘business test’, will reassure freelancers for representing “the devil they know.”

And the devil they don’t know, reminded Brookson, was always conceivable. “I’m quite happy with the chancellor’s conclusion on IR35,” Mr Hesketh explained.

“I think removing the legislation without the ultimately correct replacement would have created the risk, and the justification, for something potentially far worse [than IR35] to be imposed on freelancers and contractors.”

Moreover, handing back an eleven-year-old piece of legislation from a wide-ranging review, which braved that the only consensus was that the rules are “managed” around, suggests that the window for “legislative alternatives” to IR35 is now closed.

“I see the Budget as good news in that it shows that freelancers will be left alone for a good few years to come,” Mr Dolan said. “Certainly for the life of this parliament and probably throughout the next one too.”

Staffing body the Recruitment and Employment Confederation is less convinced that the chancellor’s so-called ‘reform’ to IR35 will cause freelancers to celebrate.

The REC’s Gillian Econpouly, its policy chief said: “This is a missed opportunity for real, tangible simplification that would have helped entrepreneurs across the country.

“A dedicated [IR35] helpline and other such measures are no substitute for real reform.”

But contractor trade body PCG, set up to oppose the original IR35 proposals of 1998, says the four incoming mechanisms actually amount to “major reform of the administration of the law.”

Firstly they provide “greater pre-transaction certainty”, the Budget says, by offering a dedicated, and presumably confidential, helpline staffed by the Revenue’s IR35 “specialists.”

Secondly, the publication by HMRC of case studies showing an outside-IR35 position should “provide greater clarity” to taxpayers potentially affected by it.

And thirdly, IR35 reviews will be restricted to what HMRC deems (but is yet to define) “high risk” cases. The fourth mechanism, adds Budget 2.203, is a new forum for officials and affected parties to monitor the three approaches.

Mr Dolan was unimpressed: “History has shown that the Revenue’s IR35 experts can be biased and not up to speed with the legislation; industry figures on taxpayer wins versus Revenue losses show they often get it wrong”.

“And why would a freelancer go forward to HMRC to talk about their IR35 concerns?” he asked. “For years, the advice has been that if you are a freelancer and you send your contract to the Revenue, they are going to tell you it’s caught by the legislation.”

Mr Hesketh, at Brookson, seemed to agree that the uptake of a new Revenue-run channel for taxpayers to speak about IR35 was far from guaranteed.

“For those freelance contractors who don’t take tailored advice regarding IR35, then providing their details to HMRC will be seen as a potential risk.

“It’s not definitively a bad course, but I still recommend that self-employed freelancers take their own private, professional advice in this area, partly because it’s so complex. Of course with the right advice, you can take steps to manage your working relationships compliantly.”

For the REC, it is not HMRC that deserves the knockback but the Treasury, for its explanation as to why IR35 cannot be merely dropped, which most REC member agents wanted to happen.

“The suggestion that abolition would lead to substantial revenue loss is hard to accept,as HMRC have never been able to provide clear figures ontheincomegained from IR35,” the group said.

“At the very least the Treasury could have requested further consultation to determine this, and properly weigh up the revenue impact of the different options.”

Crawford Temple of Professional Passport, a freelancer compliance expert, reasoned: “The OTS was unable to identify the exact amount of revenue generated by IR35 [but] it is clear that the government feels this is significantly more than some may suggest.”

In fact according to the Budget report, wiping IR35 from the statue book would “put substantial revenue at risk” and, Mr Hesketh envisioned, would “encourage large scale non-compliance” if a substitute was not immediately introduced.

The government does indeed want to keep earning the revenue IR35 generates, SJD agreed, but owing to the nation’s limited room for financial manoeuvre - less so because removing it would trigger a spike in tax avoidance.

“The chancellor is sweeping IR35 under the carpet,” Mr Dolan said. “The reason the government is not getting rid of it is because it provides some income, not a lot, but there will still be some people who will pay up under it.

“Yet if IR35 was scrapped it doesn’t mean employees will quit; incorporate a company and then go back to work at their employer’s workplace. Employers would of course benefit from the tax differential, but they couldn’t force people to incorporate ‘en masse.’”

There was more instant recognition that the government’s choice of language, particularly in the chancellor’s speech, demonstrated a greater awareness of freelancers, flexible workers and micro businesses.

The high point was Mr Osborne’s four “economic ambitions” – including ‘to have the most competitive tax system in the G20’; ‘to be the best place in Europe to start, fund and grow a business’ and to have the “most flexible” workforce on the Continent.

And coming close to addressing creative workers, he said the government should resolve that the “country becomes a world leader” in the creative industries, as well as at least four other major sectors of the economy.

In part, this will be achieved by the government’s renewed commitment “to improve the stock of skills” in the digital, cyber security and creative fields – a move that each sector’s employers will welcome to ease shortages of specific specialisms.

Offering a further shot in the arm for the creative and digital space, the government said it would “expand ‘flexible’ advanced and higher apprenticeships which suit the freelance business models.”

These freelance models, which the government acknowledged were popular in the digital and creative sectors, will accompany a new grant for those ‘SMEs’ which provide advanced apprenticeships.

These businesses, and their smaller one-person, non-employer counterparts, will also benefit from guaranteed access to superfast broadband if they locate inside a newly defined ‘enterprise zone.’

Welcome news, said a UK-based investor in start-ups and the technology sector. He reflected: “Anything that encourages businesses to move here, [whether it is corporation tax or the enterprise zones] is going to be good for the economy.”

“What we’re seeing is the coalition recognise the logic in encouraging businesses of all size to succeed, which has been woefully lacking from the previous government’s chancellors.”

For the creative sector, that recognition will have a face - the Creative Industries Council – briefed to join up the creative sectors’ individual thinking on access to finance, exports, skills, red tape and intellectual property.

IP, critical to enterprises of all sizes beyond the creative sectors, will be improved, the Budget says, by a widening of the range of products and services tailored to ‘SME’ firms.

Taken with another Budget commitment to draw up a marketing plan to promote investment in the digital and creative space, Trade Mark Direct said such IP reform “can only be good for UK enterprise.”

Similarly, the Freelancer and Contractor Services Association said the extra one penny reduction in the main rate of corporation tax clearly showed that the chancellor was backing the business community.

And although not directly beneficial to small firms, this tax incentive for companies to locate in the UK should, theoretically, create new opportunities for the local workforce, including its freelance and other temporary workers.

Confirming Britain will now have the lowest corporation tax rate in the G7, Mr Osborne declared: “Let it be heard clearly around the world – from Shanghai to Seattle, and from Stuttgart to Sao Paolo: Britain is open for Business.”

Later on, and in summing up, he enforced: “We want the words: ‘Made in Britain.’ ‘Created in Britain.’ ‘Designed in Britain.’ ‘Invented in Britain’ to drive our nation forward.”

Free of gusto and more soberly, David Gauke, exchequer Secretary to the Treasury tempered: “Being open for business does not mean being open to tax avoidance.

“We are committed to creating the right tax environment for business and individuals, which encourages enterprise and minimises red tape.

“In return we expect everyone to pay their fair share. And where we see tax avoidance, we will crack down on it. That’s particularly important at a time when the government has had to make tough choices elsewhere.”

Providing a real-world example, the government said it recently shut down a scheme where the company avoided PAYE and National Insurance tax payments by claiming staff were on the minimum wage and were ‘topped up’ with dividends.

Legislation to tackle such attempts to ‘disguise remuneration’ will be introduced, as proposed in June’s emergency Budget, while new rules to prevent additional tax avoidance schemes from being marketed will be consulted on in May.

Asked about the continued clampdown on tax avoidance schemes and Employee Benefit Trusts in particular, Brookson said it was expected and was unlikely to trouble the vast majority of freelancers.

“For the average freelancer looking for the right way to begin working for themselves, I can’t see that EBTs can be the right way to go,” Mr Hesketh said.

“For me, an EBT isn’t a way of working; it’s primarily a tax planning vehicle. Sole trader, limited company or umbrella provider, by contrast, are each a way to work for yourself.”

Under the Budget, a new advantage to any one of these three existing corporate forms is an incoming moratorium on all new domestic regulations for its owner until 2014.

Although all the details of what amounts to a cap on red tape are yet to emerge, the initial commitment is that firms with fewer than 10 employees, and “genuine start-ups,” will not face any new (UK) rules for the next three years from April 1st 2011.

“Start-ups,” as defined by the government, includes any businesses that started trade on or after the moratorium, unless during the six months before the business began, the owner ran another firm that did similar activities.

Cogs, the creative recruiter, reflected: “We believe this reduction [in red tape], coupled with the upcoming Agency Workers Regulations and the announcement today that IR35 is here to stay, means that we’ll see more freelancers moving away from…PAYE to limited companies.”

However the moratorium doesn’t mean freelancers and other micro businesses can escape being potentially forced to make some changes if, as sole traders or limited companies, they are VAT-registered.

“The government will mandate online VAT registration, de-registration and variations, and make other changes, including removal of the UK VAT registration threshold for non-established businesses, with effect from 1 August 2012,” the Budget states.

“The government will also put forward regulations which, subject to consultation, will require all remaining VAT customers to file their VAT returns online and pay electronically from 1 April 2012.”

The subtext of these two announcements for micro businesses – a plus, in the shape of no regulatory changes for three years - followed by a minus, in the shape of mandatory VAT practices, reoccurs throughout the Budget.

The chancellor’s announcement to increase the mileage allowance payments for any motorist required to drive for work is a case in point.

Under the move, the allowance will rise from 40 to 45 pence a mile for the first 10,000 miles which, while a sizeable uplift in isolation, fails to offset the current and rising cost of petrol, according to the latest data from the AA.

“Not for the first time in recent Budgets, the government has got other, bigger revenue items [than IR35 and freelancers] on its agenda,” Mr Hesketh offered.

“Fiscally, they’ve got very little room hence why this is a revenue-neutral budget with nothing to giveaway. The economy is still faltering and the deficit still needs sorting out, so we were always going to see the chancellor give with one hand and take with the other”.

The gloomy economic backdrop, which includes a downgraded growth forecast and a rise in public borrowing, may be why Mr Osborne didn’t go far enough to “go against the grain” of the last chancellors before him.

“Mr Osborne wasn’t any kinder to flexible workers such as contractors or freelancers; he’s just decided to leave them and everybody else alone until the [envisioned] merger of tax and NI, which I don’t think the government will ever actually do,” Mr Dolan explained.

“But as long as they look into this attempted merger to supposedly sort out tax anomalies, they can’t at the same time be seen to tinker with small business tax if they really want people to believe that the merger is actually going to happen.”

Stuart Davis, FCSA chairman, endorsed: “We are glad that the government is adopting a cautious approach to the merger of NICs and income tax rates, [because] any future alignment will be bad news as it potentially reduces the incentive to accept the greater risks that freelancing and contracting involves.”

Still, in the nearer-term, six or even 12 months from now, most freelancers will probably look back at Budget 2011 and conclude that it was a “sensible budget for the economic and fiscal circumstances,” Mr Hesketh said.

The fact it didn’t introduce a ready and waiting ‘son of IR35’ won’t be sniffed at either. “The people who pay under IR35 [already] will continue to pay after today’s Budget,” one freelance worker said.

“While that means the Revenue will still get its fill; most of the [independent] workforce will just carry on with business as usual.”

One fitting explanation came from Mr Osborne himself. The chancellor said in his speech: “We have already asked the British people for what is needed, and today we do not need to ask for more. So this is not a tax-raising Budget. But nor can we afford a giveaway.”

 

 

24th March 2011

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