Tax tests for contractors criticised

HMRC has come under fire over the release of new guidance for contractors and freelancers on the complex tax legislation IR35.

In the 2011 Budget, the Chancellor recognised that the legislation needed simplifying and consequently set up the IR35 Forum asking business groups to contribute and explore new approaches to the way IR35 is administered.

New guidance was released this week following the IR35 Forum, but the bodies that supported the Government claim that HMRC 'has missed a great opportunity to bring clarity, transparency and fairness in dealing with IR35.'

The guidance includes a series of tests and scenarios designed to help contractors to establish their situation and likelihood of being investigated.

The supporting business bodies, which include the Federation of Small Businesses (FSB) and the PCG accept that new advances such as better guidance and more detailed scenarios are positive steps forward, but believe that HMRC has failed to introduce clarity and fairness.

In fact, the bodies claim that the tests are 'counter-productive and represent greater complexity rather than a simplification of IR35 that had been the Government's goal'.

Commenting, Chris Bryce, PCG chairman said: "HMRC's new guidance demonstrates their fundamental lack of courage and commitment to improve the operation of IR35. While the external members of the Forum have worked tirelessly to develop innovative solutions, HMRC appear at this stage to have opted for a risk averse approach that will not deliver the improvements that are so clearly needed."

The bodies believe that the scoring does not accurately reflect the way that businesses operate, Martin Hesketh, Forum representative from the Freelancer & Contractor Services Association (FCSA) said:

"The proposed scoring system undermines the business entity tests altogether. It will push a disproportionate number of businesses into the high-risk category, and in so doing will prevent genuinely high-risk cases from being identified. An alternative scoring system, backed by a majority on the Forum, was suggested but to date those suggestions have been rejected by HMRC."

The Forum will now monitor the new measures over the next 12 months, which HMRC has termed 'the test and learn phase'.

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