Government response to the House of Lords’ IR35 report

The Government has now published its response to the House of Lords’ Select Committee IR35 report.

IR35 won’t be abolished, but we knew that already. So can we expect any changes at all? Interestingly, it seems that yes we can. Most are likely to be administrative, but some could also bring further clarification in this tricky area and others may eventually lead to a slight reduction in the administrative burden. A few highlights follow below.

The Exchequer protection and costs of IR35
The Government’s response provides a little more analysis of the £550m saved through IR35 and the accompanying Exchequer protection. Clearly some sweeping assumptions have been made to reach these figures, but then this was always going to involve some guesswork particularly around taxpayer behaviour. It acknowledges

‘The main areas of uncertainty in this costing relate to the salary levels at which individuals would incorporate and the number of directors who would change their remuneration strategy in the absence of IR35. Emerging evidence, including that provided to the Committee by HMRC in arriving at the IR35 costing, indicates that those on lower salaries are incorporating and that the salary bracket used in the calculation for employees could therefore be further expanded.

‘HMRC will publish during autumn 2014 an updated administrative impact assessment note setting out the current administrative costs which taxpayers incur in dealing with IR35.’

The IR35 Forum
The government clearly believes that the work of the IR35 Forum is going to play an important role in making administrative improvements to the system. HMRC will continue to work with the Forum to seek to raise contractors’ awareness of IR35 and dispel perceptions that HMRC is targeting those genuinely in business providing their services through a personal service company. It is hoping to find ways to further streamline the operation of IR35 and the Business Entity Tests are going to be looked at again.

The “service company” questions on the personal tax return SA100 and the real time information employer year end declaration (formerly P35)
Since these questions first appeared they have caused confusion and irritation to those operating payrolls and to individuals (and their agents) completing tax returns. HMRC is to undertake a full review of these questions with a view to making any necessary changes at the earliest practicable date.

As contractor accountants, Clear Accounts provides IR35 advice so that you can assess your position and avoid falling foul of IR35 legislation.

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