Body shopping puts freelances at a tax disadvantage to software houses

Dear Mr. Horgan,

A REVIEW OF COMPETITION RESTRICTIONS IN THE PROFESSIONS

I understand that you have already received a submission from the Professional Contractors Group, in connection with the review you are currently undertaking. As a freelance I.T consultant, my interests are represented by the P.C.G, and I fully endorse their comments on this issue. However, I would also like to take this opportunity to briefly explain how my own business is being prevented from competing effectively, by the measure known as IR35, which may soon become law.

Prevention of Competition

Although I am a "one man" company, it is important to realise that I am a genuine business, facing genuine competition. This emanates from similar "one man" companies, and also from larger software houses that may employ hundreds, or even thousands, of consultants.

In addition to bidding for large fixed price contracts, software houses also commonly indulge in the practice known as "body shopping". One or more of their consultants are supplied to a client for a fixed period, during which time they work on the client's site, using the client's equipment, under the client's day to day control. The consultants are usually supplied at an hourly or daily rate. This is far less risky than taking on a fixed price project. Hence it is the preferred source of income, both for freelance consultants, who often do not have the resources to bid for fixed price projects, and for software houses, who seek to minimise their exposure to risk wherever possible.

The "body shopping" arena is where competition between freelance consultants and software houses is the most marked. Larger overheads make software house consultants typically two or three times more expensive than their freelance counterparts.

However, IR35 now brands freelance consultants engaged in such activities as "disguised employees" of their client, and liable to account for 95% of their company's income through PAYE. Software houses face no such restrictions, and are able to continue to supply their staff to clients without facing any adverse tax treatment, under precisely the same terms that would classify me as caught by the new regulations.

Under the IR35 rules, if all my company's income is derived from "body shopping" it will be impossible to make a profit, unless my total expenses amount to less than five percent of the contract's value. I consider this unlikely. Hence, if I am to remain in business, I have to find alternative sources of income. The rules directly prevent me from competing with software houses in this particular market, a market that has traditionally been the mainstay of the freelance consultant.

Your Consultative document states:

"The professions must be…free to adopt the business structure best suited to meeting clients' needs."

Most clients need to have I.T consultants working alongside their own staff for the duration of a project. My business is being prevented from fulfilling this need, while software houses are free to continue to do so.

Creation Of Uncertainty

The examples provided by the Inland Revenue, designed to illustrate which contracts will be caught by IR35 and which will not, only show that there is a huge "grey area", where it is impossible to be certain how a contract will be treated. Indeed, a contract initially deemed to be outside the scope of IR35 may later be deemed to be caught by the new rules, due to other external factors, and vice versa.

Hence, no matter how careful I am in declining work that appears to be caught by the new regulations, and only accepting work that is not, I cannot be certain what my final tax bill will be at the end of the year. It is impossible to run any sort of business successfully under such conditions.

Fast Track Visas

One of my current clients, a large blue chip company, is already preparing to receive several I.T consultants directly from India. At the same time this is happening, it appears that my contract is unlikely to be renewed.

Losing custom through being undercut is all part of the competitive market place, and if foreign consultants are prepared to work for lower remuneration they deserve to succeed. However, in such cases it is not the foreign consultants themselves that my business is in competition with, but the software house or consultancy company that imported them. These companies are now being granted unfettered access to a supply of cheap labour, in order to compete with U.K freelancers on price, in a way that they never could when supplying their own U.K staff to clients. Of course, any profit made from such practices may be invested, retained, or taken as dividends, whereas any profit my business makes from similar work is taxed as if it were salary.

I am also concerned at the possible exploitation of the foreign consultants being imported. An Indian colleague, who has been in the U.K for several years and so is not part of the fast track visa scheme, has a U.K agent who is taking 70% of his fee. This is excessive, even allowing for transportation costs and other overheads. His accommodation is not provided; he has to arrange and pay for this himself out of his remaining 30%. Under the conditions of his work permit, he is not allowed to change his agent. I doubt whether participants in the fast track visa scheme can expect better treatment.

Objectives

Question 13 of your Consultative document asks about the objectives of the restrictions. Stated objectives, such as the eradication of the "Monday / Friday" scenario, where an employee leaves permanent employment only to return to the same site as a freelance consultant, clearly differ from the genuine objectives. Hence, any attempt to explain the objectives is speculation on my part.

Clearly, the Government intends to increase the amount of tax and National Insurance collected. As it does not recognise freelance consultancy as a genuine business activity, they perceive the use of a corporate structure for such enterprises as an abuse of the tax system. In particular, they appear concerned about the use of dividends, rather than salary, for consultants' remuneration. Their response, as shown in their own Regulatory Impact Assessment, is to introduce measures that will result in the closure of the businesses they regard as bogus.

My belief is that such measures are hugely disproportionate. The salary / dividend issue could be resolved either by self-regulation, or by measures to impose a national minimum wage on company directors. There is no need to destroy genuine businesses. To do so will reduce the number of freelance I.T consultants operating in the U.K. This will reduce flexibility, and limit the choice available to clients, leading to increased costs. These increases will be passed on to the general public, or ironically, will reduce the Government's tax take, as company profits are reduced.

IR35 is not yet law, and as it is grossly unfair in its treatment of an estimated 100 000 small businesses, it must not be allowed to become law.

Yours sincerely,

Andrew Platt