The coalition government’s launch of the new Office of Tax Simplification brings fresh hope of clarity on IR35, according to employment lawyer Chris Tutton at law firm Irwin Mitchell.

Earlier this week, Chancellor George Osborne established the Office of Tax Simplification (OTS) to identify areas where complexities in the UK’s tax system for both businesses and individual taxpayers can be reduced, with findings published ahead of the Chancellor’s Budget.

IR35 was proposed in the 1999 Budget of the then Chancellor Gordon Brown to target ‘disguised employment’ – workers who receive payments from a client via their own company. These payments are not subject to NICs (National Insurance Contributions) as they can be treated as dividends, and workers can also save tax by splitting ownership of the company with family members to place income in lower tax bands.

Tutton told Recruiter: “The focus of the new OTS on IR35 is certainly to be welcomed. IR35 was introduced to crackdown on individuals avoiding tax by supplying their services through a service company and paying themselves in dividends.

“However, many would agree that over the past decade, the IR35 regime has become notoriously complex for organisations and contractors. The Coalition’s stated aim is to replace IR35 with a simpler regime that prevents tax avoidance but doesn’t inhibit the flexibility of the labour market.

“One of the key issues under the current IR35 regime is whether a worker would have been an employee of the client they work for if they had been working directly for that company, as opposed to via an intermediary. If they would not, then the intermediary company and the worker are not be caught by the IR35 rules and they will be able to take advantage of lower tax and National Insurance rates.

“Accordingly, a worker’s employment status is of critical importance, and much case law has developed in this area. It is not yet clear whether the government will try to simplify the question of employment status under the new regime or whether this will continue to be a battleground. Recruiters will be hoping that the OTS’s review will identify a feasible way to provide some certainty for organisations and contractors.”