Lack of action on review of IR35 administration

Contractors will be disappointed at the lack of action from HM Revenue and Customs in response to a review of the new approach to IR35 compliance.

In April 2012, HMRC agreed to improve its administration of IR35. The Government/industry advisory group, the IR35 Forum has now reviewed the new structure and made 32 recommendations.

HMRC's response and limited acceptance of the recommendations will not be seen as game-changing.

Here is a summary of the recommendations and HMRC's stance.

Recommendations

Online guidance

Recommendations 1 to 5 share a common theme on updating online guidance on IR35. It recommends that HMRC continue to update the IR35 guidance pages on the gov.uk website and update or create links to it from other pages including information about IR35 from Companies House when businesses start-up.

HMRC will adopt most of these recommendations.

Promotion and Communication of IR35

Recommendations 6 - 17 aim at raising awareness of IR35 in a number of ways, including HMRC to write letters to customers who they have identified as potentially being affected by the IR35 legislation to help to raise their awareness, explain how the legislation works and highlight where people can go for help and what they need to do if they think they are inside the legislation but haven't been operating it. (Recommendation 6)

It also advises that HMRC and/or other IR35 experts speak at events such as those held by various representative bodies/trade organisation. It recommends articles in HMRC's publication, Agent update. It also suggests third party groups such as accountancy bodies, should send out material or hold seminars, again supported by HMRC speakers, as well as HMRC hosting its own free of charge seminars.

There should be more effort to educate the trades unions and educate large businesses about IR35 and help them to understand the issues for them as end clients.

There were further recommendations aimed at using additional resources such as HMRC's own communications teams to run general and specific campaigns, such as targeting vulnerable groups or industry specific sectors.

HMRC was non-committal saying that some promotional recommendations have been rejected immediately as they did not represent good value on their return for tax payers, but that it would look to work with external partners as well as its own resources to raise awareness.

Business Entity Tests

Recommendations 18 - 21 advocate the abolition of the controversial Business Entity Tests. They were introduced as a guide for contractors to judge their risk of being subject to an IR35 investigation. However, from the outset they have been steeped in problems and were never correctly used for their intended purpose, including in the public sector.

HMRC agree these tests were no longer fulfilling their original purpose and accepted the recommendations relating to the abolition of BETS.

HMRC IR35 Helpline and Contract Review Service

Recommendations 22-25 suggest ways to improve HMRC's under-used Contract Review Service, including the involvement of external advisers.

HMRC will look again at some aspects of the service.

New Compliance Approach

Recommendations 26 - 32 There were a number of recommendations to improve the timescales of enquiries and more transparency with regards to information requested and the reasons why.

HMRC agreed one point, in so much as they would provide an agenda for meetings with those under review.

Background

In 2010 the Government asked the Office of Tax Simplification (OTS) to review IR35 (the Intermediaries legislation). The OTS concluded that IR35 should either be suspended with a view to abolishing the legislation or retained but with much improved administration.

The intention was to improve the way IR35 is administered, which included the establishment of the IR35 Forum, an advisory and discussion group of HMRC officials; professional practitioners and industry and trade representatives was established.

IR35 Forum has now reviewed the progress against the objectives to improve the practical operation of IR35.

External Forum Members have worked with HMRC Forum Members to produce detailed reviews of five specific areas with recommendations attached to each. The publication of this report brings together those reviews, and sets out HMRC's response to the recommendations.

Full details of the report are available here: IR35 Forum: Administration Review.