Tax simplification body delivers IR35 report

The Office of Tax Simplification (OTS) has published its interim report on how best to simplify the way small businesses are taxed. Of particular interest to contractors will be the proposals for alternatives to IR35.

The report, which you can download here (PDF), provides three main alternatives to the current IR35 regime:

1. A suspension of the current IR35 legislation, with the intention of permanent abolition.

2. Keep the IR35 rules as they are, but improve the way HMRC administers the legislation.

3. Create a 'genuine business' test to help provide certainty to contractors who may be caught by IR35.

Although many contractors will view option 1 as the ideal scenario, it seems unlikely that the Government will abolish IR35 given the income tax and National Insurance Contributions it may lose as umbrella company contractors look to work via limited companies instead.

Most industry commentators believe that option 2 is the most likely option, as option 3 would appear to be a non-starter given that no-one has come up with any workable way of accurately testing for IR35 compliance in the decade since it became law.

The final OTS report is expected later in the year. We must wait for the March 23rd Budget to see whether or not the Chancellor makes any announcements relating to the simplification of the tax system in more general terms, such as the merger of income tax and NICs.