Conservatives will repeal IR35
Today the Conservative Party announced that it will repeal the damaging and short-sighted IR35 legislation which has caused mayhem in the IT sector and driven hundreds of specialists abroad.
The Conservatives' Press Release is as follows...
The IR35 proposals, which were first announced by the government in a press release from the Inland Revenue in 1999, attempt to treat specialist contractors, mainly in the IT sector, as though they were employees for tax purposes. The proposals were enacted in the Finance Act 2000.
Shadow Secretary of State for Trade and Industry, Rt Hon David Heathcoat-Amory MP said:
"IR35 was a sly measure which turned into a disastrous attack on the IT sector. In seeking to eliminate the bad it destroys so much that is good. The Government fails to understand that contracting out is a legitimate and growing practice in IT and other sectors.
"Labour have been deaf to the reasonable representations from the industry. By contrast we are taking positive steps to free people who are essential to the new economy from this repressive measure."
ENDS
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Notes to editors
After extensive consultation with, among others, the Professional Contractors Group the Conservatives have decided that the existing legislation will be replaced by targeted legislation to deal with any abuse of personal service companies for purely tax purposes. There will be further consultation with the industry before such replacement legislation is brought forward.
Our Policy
A future Conservative Government will repeal IR35 and replace it with legislation to address abuses.
Background
In the IT sector and certain other sectors, there has been an increasing trend towards the contracting-out of services to increase labour market flexibility. This often involves the formation by individual experts of private sector companies. As a general principle, the Conservative Party welcomes the formation of such companies and the extension of labour market flexibility.
There are, however, some examples of abuse in which such companies are merely used as a device to avoid NICs and tax. For example, an employee may restructure his employment relationship without actually changing his duties, responsibilities or risks by forming a company, which then contracts with the client to provide the services of the shareholder. The client, instead of paying the Personal Service Company shareholder a salary, pays the PSC a fee in accordance with the terms of the contract. After deducting business expenses, the PSC’s shareholder pays himself in dividends and no NICs are payable either by the PSC or by its client.
The Government’s Approach
Unfortunately, the Government, in seeking to curtail such abuses that exist, has over-reacted and their heavy-handed approach threatens to undermine significant specialist sectors of our economy. The Government took action by announcing in 1999, via Inland Revenue Press Release 35, that people providing services through PSCs would be treated as employees for tax purposes and would be permitted only a 5% deduction from revenues for business expense.
This policy amounts to a significant attack on enterprise and innovation with serious consequences. It is driving some of our best people overseas. The rigidity of the 5% rule amounts to a tax on business expense. The Professional Contractors Group estimate that 150,000 small knowledge-based companies will have to pay for their training budget out of taxed income. There are other consequences:
1. IR35 taxes independent consultants as employees of their clients, yet gives them no employment rights: no holiday pay, sick pay or rights to claim unfair dismissal;
2. IR35 affects small employee-owned companies, yet does not affect their large competitors who provide the same service on the same terms.
3. IR35 undermines the flexible and adaptable labour market, which is essential for international success in the IT sector.
Our Approach
We will repeal IR35 and replace it with legislation to address abuses. We will review the circumstances under which the establishment of a PSC is masking what is in effect an employment relationship, and is designed purely to avoid NICs or tax. We will propose rules targeted on such abuse and consult the relevant industry sectors before taking action. For example, there could be a presumption that short-term contracts provide prima facie evidence that the PSC is genuine.
Cost
We are aware that some commentators believe that IR35 will actually have a negative effect on tax revenues by encouraging different forms of avoidance and by driving legitimate operations abroad. The Government, however, estimates that IR35 will increase tax revenues by around £400 million in 2001/02. We believe that the effect of our targeted measures on tax abuse may actually produce more revenue than IR35, once the indirect, behavioural consequences are taken into account. However, as a matter of prudence in costing our proposals, we have ignored the expected behavioural consequences and have allowed for around one third of the revenue gain from IR35 to be lost through a more targeted regime. This would produce a net fiscal cost for our proposal of £150 million and means that we have now allocated for tax cuts up to £4.1bn of the £8bn of public expenditure savings compared to Labour’s plans that we have identified by the year 2003-04.
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Richard Powell, UKTECH