New Challenge To IR35

Ten years on from the introduction of IR35, the controversial tax legislation aimed at contractors is facing a challenge in the form of an Early Day Motion from Liberal Democrat MP Lorely Burt, calling for its abolition.

IR35 was introduced by the government in 1999, amid concerns that some freelance and contract workers were setting up limited companies, through which they would still effectively do the work of an employee but avoid tax by paying themselves in dividends, which are not subject to National Insurance, or by splitting ownership of the company among family members who are in lower tax bands - known as 'disguised employee' arrangements.

However, the measure has been consistently opposed by contractors and freelancers who argue it places them under the constant threat of a lengthy and expensive investigation by HM Revenue and Customs, while at the same time raising little extra tax. According to the Professional Contractors Group, of the 1,468 IR35 cases known to them, only six have resulted in additional tax being paid and, given the cost of policing it, there is no evidence that the tax is raising any money for the Exchequer, which does not publish figures on the effectiveness of the legislation.

A contractor caught by IR35 will generally have all their fees considered as salary, and therefore face a significantly higher tax bill than a contractor who falls outside IR35. Determining IR35 status is not straightforward, and it is advisable to seek an opinion from a specialist firm such as Danbro Accounting.

While Early Day Motions seldom become law they are a useful way for MPs to highlight issues of concern to their constituents, and this motion has helped keep opposition to IR35 near the top of the political agenda. It has now been signed by 85 MPs, although the majority of those consist of Ms Burt's Lib Dem colleagues. While a report by Conservative MP John Redwood two years ago recommended its abolition, the Conservative Party leadership has declined to back Ms Burt's motion, saying that - while they recognise the problems with IR35 - it could not simply be abolished without replacing it with something else to catch disguised employment.

We will keep you informed of any further developments in this area, but in the meantime, if you need any help or advice on dealing with the current IR35 requirements, please contact us and our experts will be happy to help.