The end of IR35

Date: 25 May 2010

My Accountant Friend welcomes the new coalition government’s pledge to abolish IR35, the unpopular tax guidelines for contractors.

We welcome recent news that the coalition government plans to abolish the current IR35 legislation. IR35 was introduced in 2000 to eliminate a loophole that allowed contractors to effectively work as full-time employees for a business but to avoid paying tax and National Insurance contributions as an employee, and so end up paying less tax.

However, the legislation caught up and frustrated many contractors who complained that it was bureaucratic and time-consuming, and that the rules on who it applied to were unclear.

The coalition government outlined its plans to abolish IR35 in its Programme for Government, published on Thursday 20^th May. "We will review IR35, as part of a wholesale review of all small business taxation, and seek to replace it with simpler measures that prevent tax avoidance but do not place undue administrative burdens or uncertainty on the self-employed, or restrict labour market flexibility," the coalition said in the programme document.

"Few will lament the passing of IR35 when it is finally confined to history. It was badly drafted and created massive and unjustifiable problems for contractors".

– Professional Contractors' Group spokesperson

My Accountant Friend says,

“We’d like to see the IR35 rules replaced by clearer and better defined legislation. As part of this we’d like to see specific tests that contractors can use to calculate their tax liability with certainty. What’s more we want clear, unambiguous guidelines to determine a contractor’s employment status.”

We also caution clients and contractors that the changes will take time and it’s probably likely that any changes will come into effect in the next tax year. So, clients should continue to ensure they operate outside of IR35 using the current guidelines for the time being.