Should contractors be cheering IR35's disappearance?
A very short, a rather vague, paragraph in yesterday's coalition government agreement would have had the City's contractor community popping some champagne corks - IR 35 is likely to be scrapped.
In its simplest form, IR 35 requires contractors to either establish themselves as a limited company - an expensive option that allows them to pay corporation tax rather than income tax - or as an 'umbrella company', whereby the highest earner income tax rate can be applied to earnings.
Except, of course, it's not simple at all, and many a contractor has been hauled up for some hefty penalties due to a misinterpretation around the administrative burden it requires.
The government says it will now review IR35 as part of an overall review of small business taxation and will "replace it with simpler measures that prevent tax avoidance, but do not place undue administrative burdens or uncertainty on the self-employed".
The Professional Contractors Group was established to fight against IR35, so understandably it's welcomed the move. "It has caused great heartache to many people," says John Brazier, managing director of the group. "The cost in distress has been high, but the revenue for HMRC has been minimal."
It's still early days, but what can we expect in the way of a replacement for IR35. Tax experts warn that it's not necessary going to mean more cash in your pocket.
Alex Henderson, tax partner at PricewaterhouseCoopers says: "Whatever comes will undoubtedly be streamlined, which is welcome, but in the current environment I expect any changes will be limited to reducing the administrative headache, rather than the overall tax burden - particularly within the high earning City contractor fraternity."
"Be careful what you wish for," agrees Kate Cottrell, managing director of Bauer & Cottrell, an IR35 advisor to contract and freelance workers. "Many people have been caught out by IR35, which means they'll welcome the move to simplify it. But it will be very difficult to apply a one-size-fits-all solution to a broad variety of workers - whether that be high earning City contractors or your average temp worker."
