Budget 2011: IR35 unchanged - to be policed better.
Umbrella Company remains safest option for contractors.
31st March 2011
Many contractors would have waited with baited breath during the Chancellor's budget announcement last week. The reason for their hopeful anticipation was one of three possible courses of action on the "thorny" IR35 legislation made by the independent Office of Tax Simplification (OTS) in its report two weeks earlier - to abolish IR35.
Charged in July 2010 with reviewing, consulting on and then making recommendations aimed at simplifying Britain's tax system for small businesses, the OTS duly devoted a significant amount of their attention to the IR35 rules and their effects. In their report, they put forward three medium term solutions to IR35; leaving the legislation unchanged but policing it better, abolishing it altogether or introducing one definitive "genuine business" test intended to remove the majority of contractors from the scope of IR35.
These options were considered medium term solutions and were framed by the larger (and longer term) proposed strategy of merging Income Tax and National Insurance Contributions. This, they said, would remove the need for IR35 in the long term. The implication being that without the tax-advantage of avoiding NICs on dividends, Personal Service Companies would no longer save contractors significant amount of tax (costing the exchequer money).
In his Budget George Osborne predictably chose the safest of the three recommended options for IR35 - maintaining the status quo but with additional resources to help police and educate on the policy. His reason was the possible incorporation of many Umbrella Company and full time employees if the IR35 barrier was removed.
For contractors using our umbrella company services, their position remains unchanged; they will not be affected by IR35 and can relax knowing they are in safe hands. Those contractors operating as director of their own limited companies should be very sure they are not caught by IR35 in light of this government's dedication to anti-avoidance and the increased policing of IR35. If in doubt an Umbrella company might well be a better option. Contact us for a confidential, no-obligation consultation.
Notably the chancellor indicated that the more radical proposal to merge NICs and Income tax in the longer term was being taken seriously by the government (despite acknowledging the huge difficulties involved). The notion that this would remove the need for IR35, however, was dispelled when the government indicated that any long term merging of NICs and Income tax would not then apply NICs to other forms of income such as dividends.
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