The House of Lords has just finished its report on IR35 and recommended its reform. What changes are proposed and when are they likely to take effect?
Lords report recap. At the end of last year we told you about the House of Lords “call for evidence” on the pros and cons of IR35 (yr.14, iss.6, pg.1, see The next step ). As you probably know, IR35 aims to cancel out any tax and NI advantage individuals gain by running their business through a company or partnership.
Scrap it. Perhaps the most important question the Lords addressed was whether, given the unclear legislation and HMRC’s mostly ineffective attempt to enforce it, IR35 should be scrapped. The Office of Tax Simplification had previously recommended this option. However, the Lords have rejected it. They believe it would create too great a risk of unfair tax avoidance. It therefore looks like IR35 is here to stay.
Changes. The Lords report includes 16 recommendations, although not all of these relate directly to IR35. There’s nothing ground-breaking; in fact it’s all rather vague. The general gist is that HMRC should carry out studies and surveys and report back to the government with recommendations on how to make IR35 more effective. So if you were on tenterhooks expecting the worse you can relax – at this rate it’s likely to be another two years before changes to the law are made.
Investigations. According to evidence given to the Lords by HMRC, there’s no intention for it to step up IR35 enquiries, but it will continue with its existing programme. If you personally provide services potentially caught by IR35, try to keep a low profile with HMRC.
Tip. One way to avoid unwanted attention is to not answer the question on your self-assessment tax return and end of year RTI reports that asks whether your company is a personal service business. The law doesn’t require you to answer it and doing so will only flag your company as a potential target for an HMRC enquiry.
The report doesn’t suggest any definite changes, only that HMRC look again at the rules and recommend ways to make IR35 more effective. In our view that’s likely to take two years, so until then the status quo applies.