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Small business taxation needs ‘major structural change’


The Office of Tax Simplification (OTS) has called for ‘major structural change’ to small business taxation following a review into the future of the tax and IR35 system.


In its second report commissioned by the Chancellor George Osborne, the OTS recommends abolishing the contentious IR35 regime or suspending it until significant change is implemented.


It added that the anomalies raised by the current regime would be eradicated by merging national insurance (NI) and income tax into a single system.


IR35 determines who must be treated as an employee of a company for tax purposes, and affects many contractors and small family firms.


‘Our aim is develop practical ideas that will make things easier for small businesses when it comes to their tax responsibilities,’ said John Whiting, Tax Director for the OTS.


‘Having listened to the concerns raised through our roadshow events and many representations, we hope we’ve identified the main problem areas and that people will agree these initial recommendations will improve matters. We’ve suggested ways forward on the thorny issue of IR35, though it’s clear there is no easy solution there.’


While business groups have largely welcomed the recommendations in the report, some experts have argued that a full merger of NI and income tax is unlikely.


Chris Bryce, chairman of the Professional Contractors Group, commented: ‘Should the Chancellor accept the recommendation to abolish IR35 this would be a major advance towards honesty, transparency and fairness for the freelance community.’


Meanwhile Richard Baron, Head of Taxation at the Institute of Directors, said: ‘This report raises more questions than it answers. But that is a good thing.


‘Businesses repeatedly complain about the administrative burdens that are imposed by the tax system. We can, and should, implement some quick wins. But to do more than that, we must look again at some fundamental features of our tax system.’


The report can be viewed on the Treasury’s website.