Abolish IR35 – Why the Tories Didn’t Do It

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Abolish IR35
Abolish IR35

Abolish IR35

Prior to the 2010 election, the Tories led the Professional Contractors Group (now IPSE) to believe, with winks and nods, that they would abolish IR35 if they got elected. Indeed the PCG rushed out a Press Release just before the last election to their members. It told them that the Tories had promised to ‘look at’ IR35 again if elected.

When they did get elected, they were as good as their promise. They did ‘look at’ IR35 again and decided not to abolish IR35.

Here is their reasoning at the time.

Office for Tax Simplification

According to the Office for Tax Simplification there is a danger that if they suspend IR35 and then abolish it there may be a stampede out of Umbrella Companies. Contractors may jump into Limited Companies with a fiscal cost to the Government.

In their report they say that the Benchmark for success in Suspending IR35 and then abolishing it would be “No quantifiable changes in incorporation rates, no reduction in size of umbrella companies or agency payrolls”.

That may take contractors back a little.

Many of them were hoping that any abolition to IR35 would take them back to 1999 when everyone had limited companies. They paid a lot less tax then.

Operating Via an Intermediary

According to the OTS if the Government suspend and abolish IR35:-

“All individuals currently and in the future operating via an intermediary will benefit from this change. Agencies and end clients may also benefit from this certainty.

“The Exchequer loss may mean that employees end up facing an additional tax burden particularly in the current fiscal and economic climate.

“Other losers include umbrella companies, specialist IR35 and traditional accountants, contractor membership organisations, contractor information web sites, specialist providers of IR35 advisory services, providers of IR35 tax losses insurances, and some agencies”.

Dangers If They Abolish IR35

Other dangers they foresee are:

– Scope for high earning employees to move to incorporation lured by this and the forthcoming rises in NIC.

– Employment rights and statutory benefits may not be of much value to highly skilled individuals. That’s even although the importance may have grown in the current economic environment.

– Pressure on umbrella or agency workers (on agency payroll) to move to a PSC to circumvent EU Agency Workers’ Regulations.

– Potential for abuse of other tax rules. For example in travel claims as many think that it is only IR35 that triggers investigations.

Contractors may disagree that the benchmark for success of the suspension and abolition of IR35 would be “No quantifiable changes in incorporation rates, no reduction in size of umbrella companies or agency payrolls”.

UK Contractors Comment

So, that is why the decision was made not to abolish IR35.

The Governments seemed to like Umbrella Companies and were not so keen on Limited Companies.

They would rather deal with 300 umbrellas than a million limited companies, people thought at the time. So, umbrella company owners seemed cheered by this.

However, Chancellor Osborne later said that he wanted to strengthen IR35. So, he hired a Compliance team of 36 to do so. That’s when HMRC were laying off thousands of workers in other departments.

IR35, Limited Companies and Umbrella Companies

In a later budget, he said that IR35 is not working properly. He wanted to look at it again.

Also, he took away the tax relief on travel and subsistence for both contractors operating through Umbrella Companies and Limited Companies.

He may have preferred Umbrella Company contractors to Limited Company contractors. However, he would much prefer if all contractors paid their IR35 tax without any tax relief at all.

Now we find the latest Prime Minister and Chancellor saying that it is not fair that a self employed person earning £100,000 a year pays less tax than a permanent employee earning that amount.

Of course, we all know that is not comparing like with like.

However, they intend doing something about this.

They ave already taken action in the public sector.

They are expected to implement the same changes in the private sector either next year or the year after.

Anyone who thought that the Tories would abolish IR35 have had a bit of a shock.

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