The government estimates that around £420m a year is lost in tax and NICs by taxpayers ignoring or manipulating the intermediaries’ legislation (IR35). The September edition of this newsletter (see The future for intermediaries) contained details of the government’s consultation on proposals to improve the effectiveness of the rules. The consultation document set out proposals that could see the onus to verify the employment status of an individual being put on the shoulders of the ‘engager’. The option for aligning the IR35 test with that used for temporary workers in the agency rules, which is based on supervision, direction or control, was also discussed in the consultation document, along with the possible introduction of a rule that an engagement must last a certain minimum amount of time to be considered one of employment.
In response to the consultation, the Chartered Institute of Taxation (CIOT) has now suggested a new approach to tackle the problem.
With regards to whether the compliance obligation should be switched from the worker and his/her personal service company (PSC) to the organisation that they are physically working for, the CIOT does not believe this will simplify administration or reduce non-compliance. Instead the organisations that these workers are physically working for will simply err on the side of caution and deduct tax and NICs leaving it to the worker and HMRC to sort out the mess.
With regards to a ‘supervision, direction or control’ test, the Institute says that this is unlikely to increase compliance and the underlying danger with a broad brush IR35 test is that it would catch many who are genuinely in business for themselves and who would currently pass the hypothetical employment test.
The CIOT has suggested to HMRC that a better option would be to impose an annual reporting obligation on organisations that are engaging with these workers, based on the PSC notifying them whether or not it considers that IR35 applies. There should also be an obligation for the PSC to notify that organisation that it is committed to applying IR35. If this approach were to be adopted, the organisation would then report what it had been told by the PSC and whether or not it was in agreement. If the organisation was to wilfully mislead HMRC that IR35 does not apply, when in fact it did, then any debt owed by the PSC in relation to non-compliance with IR35 would fall back to the organisation concerned.
Feedback on the consultation, including the CIOT proposals, is currently being analysed and further announcements are expected in the 2015 Autumn Statement.