IR35 Reform

Wed 08 Jul 2015

In today’s Summer Budget, the Chancellor mentioned workers providing services through their limited companies in the context of ‘disguised employment’.  The proposed changes go further than not being eligible to receive the £2,000 National Insurance Contribution (“NIC”) employment allowance and dividend tax reform. In the press release which followed, the Government announced that it will engage with stakeholders this year on how to improve the effectiveness of existing intermediaries legislation (‘IR35’) which is designed to protect against disguised employment. A discussion document will be published shortly which we will be responding to.

The Government has stated that employment taxes contribute over 40% of HMRC receipts. However, there are many different mechanisms that employers and individuals can use to reduce taxes paid on earnings. In an example quoted by the Government, “two individuals doing the same job, in the same way, can end up paying very different levels of tax.” The Government therefore is taking steps to address this and to make the tax system a fairer system.

The Government recognises that many individuals choose to work through their own limited company. However, where individuals would have been employees if they were providing their services directly, anti-avoidance legislation commonly known as IR35 introduced in 2000 requires that they pay broadly the same income tax and NICs as other employees. However, as highlighted by reports from the Office of Tax Simplification and the House of Lords, it is clear that IR35 is not effective and that non-compliance in this area is estimated to cost over £400 million a year.

HMRC is to start a dialogue with businesses on how to improve the effectiveness of existing IR35 legislation. The Government wants to find a solution that protects the Exchequer and improves fairness in the system. Whilst not being eligible to receive £2,000 NIC employment allowance, both the reduction in the rate of corporation tax and the dividend tax reform (both announced today) are likely to increase the attraction of these arrangements.

For more information please contact Vaneeta Khurana, Employment Tax Director on vaneeta.khurana@mazars.co.uk