Danbro’s take on the OTS

Danbro’s take on the OTS

The Office of Tax Simplification was launched back in July 2010 and given the task of reviewing and simplifying the UK tax system. There are two main areas under review; a review of all tax reliefs and a review of small business taxation.

As a firm specialising in accounting services to contractors operating through their own small business, Danbro believe that the OTS could greatly reduce some of the red tape and complexities that have and continue to trouble many contractors operating their own small businesses. One of the areas that the OTS will review is the infamous IR35.

Danbro Managing Partner, Damian Broughton said:

“We are encouraged by the OTS’s intentions to review legislations like IR35, which still remains a grey area. We envisage that IR35’s one size fits all approach will be replaced with a more targeted method and hope that its current ambiguity will be lifted”.

What is IR35 & why is the OTS reviewing it?

IR35 is a piece of legislation introduced in 2000 to counter avoidance of tax on employment income where workers receive payments from a client via an intermediary (usually a personal service company, also known as a Limited Company) although the relationship between the worker and the client is deemed one of employment. As a result, if a contractor is caught within IR35, their gross income is treated as salary and subject to the appropriate levels of income tax and National Insurance Contributions being paid. As it stands IR35 is too subjective when contractors try to ascertain whether they are caught by IR35 (deemed an employee) or not caught (have the right to operate their own business), hence why many commentators within the industry have requested IR35 to be reviewed.

Independent body Professional Passport have recommended an effective segmented approach. They propose that legislations like IR35 should only be applied to relevant segments within the flexible workforce market. Their proposals involve defining a Professional Contractor from that of a temporary contractor. Those that are deemed as Professional Contractors should be allowed to operate in the same capacity as any other small business and not be burdened with additional legislations like IR35. Professional Passports definitions of the two segments are:

Professional Contractors; “ those that see their long term career as a contractor, do not want any enhanced rights or protection and see themselves as operating their own business with associated risks” From;

Temporary contractors; “those that contract until they can find a new permanent position”

A clear set of criteria would allow appropriate legislation to be applied (i.e. IR35 would not apply to professional contractors).

Although some commentators are calling for IR35 to be abolished all together, there are some negative implications which need to be considered. Danbro Marketing Consultant, Gerry Gregoire said; “abolishing IR35 could lead to umbrella contractors who were once caught by IR35 shift over to operating through their own Limited Company.  As a result, the government would inevitably lose millions of tax revenue and it is likely they would introduce a tighter legislation than IR35”.

The OTS is listening

Danbro have contributed to a recommendation document surrounding small business taxation that was submitted to the OTS in January 2011. The Office will report to the Chancellor in advance of Budget 2011 and Danbro envisage some of the recommendations being put forward.