Tax Bodies say IR35 legislation is 'fundamentally flawed'

A discussion paper released by the Chartered Institute of Taxation and Tax Faculty states that the IR35 rules are 'fundamentally flawed' and that IR35 should be replaced with a much clearer system for determining employment status.

The paper was released in response to the Government's recent review of small business taxation and covers a number of tax issues which affect small businesses, such as Section 660 and the new 19% rate on non-corporate distributions, however it is IR35 that has for several years been a cause for real concern for many small business owners.

Coming into effect four years ago, the paper states that despite early claims that IR35 could raise £900m for the Treasury, no Government statistics exist to show how much revenue the legislation has raised. When asked about the revenue raised, the Paymaster General has previously said: "It is not possible with any accuracy to isolate data relating solely to this legislation." - a position deemed as unsatisfactory by the tax bodies.

The discussion paper also demonstrates that the various 'tests' to determine if someone is 'employed' or 'self-employed' as per the IR35 rules are flawed - 'This is a very real practical problem for those who have to decide on an appropriate business structure and pay tax in accordance with those decisions'.

In conclusion, the paper suggests the following:

1) The IR35 rules are 'fundamentally flawed' and do not seem to have raised the revenue forecast when implemented.

2) Although the Government's efforts to tackle 'disguised employment' are understandable, 'we believe that the solution is a radical overhaul of the issue of who is employed and who is self employed. We believe that the IR35 rules should be replaced with a much clearer system for determining employment status'.

3)If IR35 is to stay, a large number of practical problems related to complying and understanding the rules need to be resolved.

The discussion paper (MS Word) can be accessed here. You can also read our overview of IR35.