Interim Report Released re Small Business Tax

10 March 2011

The Office of Tax Simplification has released its initial report into what is often called "The Son of IR35".

The findings seem to recommend to either scrap IR35 or keep it and police it better. Amendments and the possible merger of PAYE and NIC's are also cited as providing an opportunity to make the taxation of small businesses fairer.

In summary what they say about IR35 is:

"Of all the topics we tackled this proved to be thorniest. It encapsulates the tension between HMRC, who are tasked with applying the tax code in order to protect and gather revenues, and individual businesses who see IR35 as a barrier to them running profitable small enterprises with all the risks that this involves.

What is clear is that no one method of reform currently commands universal support. It is also evident that any future decision on, for example, abolishing IR35 altogether would require underpinning by a much better quality of data than presently seems to be available".

The report then goes onto say:

"Our remit requires the OTS to address the complexities that exist within the IR35 legislation. As indicated above, the structural change of integrating income tax and NICs would take away the need for IR35 but we recommend two options that the Government should consider adopting until the structural changes are introduced:

 Suspend IR35 with the intention of permanent abolition, using the period of suspension to investigate behaviours and costs; or

 Keep IR35 legislation unchanged, but improve the way it is administered by HMRC.

Our third alternative is to consider the introduction of a new “business test”. Although this option is not an immediate simplification (and would require more definitions and tests) it would aim to reduce radically the size of the population potentially caught by the IR35 legislation and thereby remove a large number of contractors from the worry of a potential IR35 enquiry. It could be investigated during a period of IR35 suspension".