The Budget has been and gone and left behind mixed emotions. Many limited company owners will be pleased at the lowering of Corporation Tax, while those pulled into the tax-free personal allowance threshold will surely be happy. But, for contractors and small businesses worried about IR35, the situation is not so clear cut.

Let’s take a look at some of the background…

It’s summer 2010 and the new coalition Government has revealed it’s setting in motion a chain of events which may bring an end to IR35. The Office of Tax Simplification (OTS) is launched with the task of reviewing the employment legislation to see if it can be simplified in its current form or scrapped entirely and replaced with a more effective measure. Freelancers, contractors and small business owners have their hopes raised the appropriate action will be taken in next year’s Budget.

Fast forward to 2011 and the OTS publishes its report in time for the March 23 Budget. In this report they make a number of recommendations. The biggest is that the Government should look at the possibility of merging National Insurance with income tax in order to largely make IR35 redundant and massively simplify the tax system.

However, they acknowledge that this will take a lot of consulting and a long time to implement – if ever it is implemented. So, they make three suggestion for what could be done in the short-term in order to reduce the burden for small businesses:

1) Scrap IR35 with immediate effect and analyse the impact it has. If businesses take advantage of the situation and tax avoidance increases, then IR35 can be brought back.

2) Leave IR35 alone. This takes the view that IR35 is effective as a deterrent and that businesses are now getting increasingly accustomed to how IR35 works and therefore the burden it’s placing on them is lessening with time. So, all we need is a better administered system.

3) Create an online business test which can categorically define the IR35 status of an individual contractor or a small businesses operations.

So, what happened?

George Osbourne took the easy option: leaving IR35 as it is but creating a specialist helpline to help concerned businesses. They say that IR35 investigations will only be undertaken in “high risk” cases.

Steve Crouch, chief accountant at Crunch said there was reason to be cheerful: “The saving grace is that if HMRC give a commitment about enforcement then smaller contractors with relatively modest income can regard themselves as “practically outside of the rules.” ¬†However, this does not help very much at the moment as there is no definition as to what is deemed “high risk” and what is “relatively modest”.

The message is: watch this space.

For the long-term, the Chancellor has set out plans to start a consultation with the view of merging NI and income tax. If and when this does happen, IR35 will effectively be made redundant. Unfortunately, the consultation process is going to take a number of years to complete. And benefits and drawbacks will be an area of heated debate.

In summary, IR35 will be around for the foreseeable future. Not exactly what the small business community wanted to hear, but if Government plans for greater clarity are fleshed out in the coming weeks and months, then members of the contractor community may just feel a huge weight being lifted off their shoulders.

At Crunch online accounting, we provide specialist services for those contractors and small businesses concerned about their IR35 status. We’ve been accredited by trade body PCG for our expertise in tackling the troublesome employment legislation. Find out more about how we can help on this link.

For more reading on this subject, check out Contractor Advisor’s brilliant guide.