IR35: Is it a voluntary tax?

I recently had a call from a firm of accountants who had reached an impasse with one of their contractor clients. They felt he was inside IR35; he felt that he could make a case he was outside. Unable to convince them that he had a case, he suggested they contact UKTECH.

As the freelancer saw it, he ran his own business; took risks; didn't get holiday pay, sick pay or other benefits from his client; marketed his services; and kept his skills up to date. He felt he was a genuine business and outside IR35.

As his accountants saw it, he worked from his client's premises; didn't have a right of substitution; and used his client's equipment. They felt he was a 'disguised employee' and inside IR35.

Uncertainty

This situation serves to illustrate the level of uncertainty which, even after four years, still surrounds IR35.

From frequent contact with freelancers via UKTECH, there are few freelancers who cannot make a case to be outside IR35. The hurdles which one has to cross to be outside were so blurred that uncertainty can be used to the freelancer's advantage and more and more cases are being settled in the freelancer's favour.

IR35 is a badly drafted piece of legislation. What most businesses - small or large - want from the Government is certainty and clarity. Yet the rules on which IR35 is based are neither, as evidenced when an accountant and their client still can't agree on his status. It is hard to imagine that multi-nationals would have tolerated such a piece of tax legislation which affected them in this way.

On the plus side, the 'right of substitution' and 'lack of mutuality of obligation' are two key factors in proving you are outside IR35. However, the exclusion of either or both in a contract does not necessarily mean a contractor is inside IR35.

There has not been a clear definition of this mythical creature which the Government has categorised as a 'disguised employee'. Neither has the Government explained what it means when it frequently refers to wanting to target its assistance at 'genuine or real small businesses'.

Voluntary tax

Several years ago, the then Chairman of the PCG, predicted that IR35 would become a 'voluntary tax' within a couple of years. There is a case to be made that it is: with certain caveats.

First, the freelancer has to be prepared to act and think like a business. He or she should not be integrated into their client's culture more than is necessary. The rewards they receive are for the risks they run. How is the business marketed? What 'employee rights' do they forgo? What risks do they take? How do they document and demonstrate they are 'in business on their own account'? What is the reality of the working arrangement?

Secondly, it can be argued that the tax system should be clear and simple enough that any business can conduct its affairs without the need for professional representation in their dealings with the Revenue. The reality of the situation is that the cost in terms of time, money and stress of 'going it alone' in a Revenue dispute has already taken a toll on a number of businesses. Now it is increasingly the case that freelancers are taking out a variety of insurance policies to ensure that they can hand over any dispute to a team of professionals.

Insurance

An insurance policy used to be associated with misfortune or accident, to provide protection against the unpredictable such as accidents, theft or something that was left to chance. It is ironic that insurance is now taken out by small businesses to protect themselves against the actions of their own Government.

IR35 is still far from clear; Section 660, the so-called married couple's business tax, has left thousands of small, family-owned businesses uncertain of their current and past tax liabilities; the recent dividend tax, IR591, was needed to 'close a loophole' which only 18 months earlier had been 'an incentive'; and now the entire small business community is watching what the Chancellor has planned in his review of owner-managed businesses, where speculation fills the void created by the lack of direct information creating yet more uncertainty about the future.