HMRC has been talking about how to make IR35 work for the last four years, since 2011. So their Budget announcement that they’d be ‘starting a dialogue’ on how to improve it was a bit of a surprise to many people. The IR35 Forum was set up in 2011 to “advise on improvements in the administration of IR35”, so what have they been doing, exactly, for the past four years? Twiddling their thumbs?

Talking about the issue for four years… and counting

So far, four long years of mulling over the subject have resulted in the notorious Business Entity Tests, which were withdrawn after just a couple of years because the public sector appeared completely incapable of handling them properly.

In the private sector very few people give a stuff about IR35 full-stop, even though personal service companies are obliged to self-assess IR35 liabilities if they come up. Obviously this isn’t good enough, but that’s the way the cookie currently crumbles.

A chronically messy big picture

The big picture is a mess. We’ve ended up with something that doesn’t work for anyone, public or private sector. HMRC has already thrown out a handful of impractical proposals for improving matters. Their latest report suggests companies who take a worker on through a PSC should decide whether or not IR35 applies, then take the right amount of income tax and National insurance as they would for an ordinary employee.

The thing is, who pays? The Red Book says “IR35  requires that those it affects pay broadly the same tax and National Insurance as other employees.”  But these quasi-employees actually end up paying much more than others because they have to shell out their employer’s share of National Insurance as well as their own.

At the same time the ’employer’ can act as the person paying the tax, at least according to some in government. But in the real world this plainly doesn’t happen. We suppose the idea is this: the ’employer’ pays extra to its contractors, which they then use to pay the levy. It’s a fair idea despite being typically clunky, but it’s also completely unrealistic.

IR35 employees pay more tax

The results of all this the confusion are dramatic. The marginal rate of tax comes out at 48.6% for a higher-rate taxpayer on IR35 compared to 42% for an employee, and for a basic rate taxpayer 39.2% compared to 32%.

All sorts of experts are calling for IR35 to be trashed, since it has never worked and they doubt it can ever be made to work. They feel it’s time to call a halt to the delay tactics, stop talking in circles and actually DO something.

In other words HMRC needs to find a simpler solution and replace IR35 asap before it wastes any more taxpayer money flogging a dead horse. And it could be a very simple solution indeed. Why not just decide, for example, once and for all, that Employers’ National Insurance is paid by employers? What do you think? Do you have a simple solution to suggest?