Friday to Monday abuse cannot justify IR35, Horgan told

Dear Mr Horgan,

I must add my voice to the many urging you to consider the effects of IR 35 on competition in the area of provision of consultancy services.

> "We are also interested in identifying restrictions which

> originate from national or Community law."

IR 35 is national legislation which is about to be challenged in the European Court of Justice. Similar legislation has been imposed -- and then rescinded as being counter-productive -- in other countries including the United States.

> Question 12: Are there any other ways in which you consider

> the delivery of professional services to be restricted?

Absolutely, yes. The IR 35 legislation will be backdated to

06/04/00 if and when it is enacted. Already this has changed the shape of my business and curtailed expansion plans.

> Question 13: What do you think are the objectives of the

> restriction?

The objectives of IR 35 are not clear. The proposed legislation has been severely criticised on this front by the tax committees of all of the leading UK accountancy bodies.

I *THINK* that the objective of the legislation was to stop the so-called "Friday to Monday" abuse, whereby an individual would be a PAYE employee of The ABC Company one day, and then an "independent consultant" presenting invoices for his/her services the next. The so-called "independent consultant" would have no intention of finding other clients and would in fact be one of

Gordon Brown's famous "disguised employees".

On reflection though, I think I must be wrong, because the proposed measures affect genuine small businesses as well as the "disguised employees". So there must be an undeclared objective, which I find moderately reprehensible and a strange way to exercise the power given by the electorate.

> Do you think these purposes are justified?

No. I have never yet met a genuine "Friday to Monday". There must be some, but even if they only have one client just look at what they are giving up:- o unemployment benefit o sick pay o holiday pay o company pension o security of employment o redundancy payments o SAYE schemes o company car o medical insurance o etc

Yes, they pay no NI on that part of their income distributed as dividends from their limited company, but they pay additional tax in the shape of corporation tax and VAT which they would not generate/pay as an employee.

So, No. The answer is "No". I personally have great difficulty understanding the rationale behind IR 35. I am convinced it would be destroyed in an open, logical debate. (As it was in the Lords, where the government's unhealthily large majority and three line whip could not hold sway.)

> If yes, please state the justifications.

N/A - No genuine justification for IR 35.

> Do you think that the restraints are more onerous than is necessary

> to meet any justified purposes?

I would need to be convinced that there are *ANY* justified purposes, so clearly I regard the IR 35 restraints as "more onerous than is necessary".

> If yes, please give reasons for your view, along with any proposed

> alternative(s) to the present requirement (e.g. the approach

> adopted in another jurisdiction).

The government's own estimate is that the proposed IR 35 legislation will force circa 60,000 small businesses to close. That seems just a tad excessive for a measure with no rationale.

The status quo ante seemed to work perfectly well in practice, so consigning IR 35 to the trash can seems the simplest and most straightforward solution. (That's not flippant by the way. That is perfectly logical, perfectly serious.)

Alternatively, dividends could be taxed as earned income subject to full marginal rates of taxation and employer and employee NI.

At the very least, the Inland Revenue should be required to give a legally binding ruling on the IR 35 status of any particular proposed contract within ten working days. (The uncertainty is the most insidious feature of this proposed legislation.)

> What are the effects of the restrictions on:

> (a) the profession and its members;

o Unable to compete effectively against larger consultancies because:- o uncertainty of incidence of tax o more restrictions on directors o training not allowable expense o legitimacy of expense against profits depends on nature of revenue stream!

o uncertain cost structure...

...but need to make pricing decisions NOW!

o Unable to invest and grow businesses and employ people because of uncertainty engendered by IR 35.

o Causing considerable stress and anxiety to directors of small consultancies, their employees, and their families. We need to make business decisions *NOW*, but the Inland Revenue can't give us hard information until cases come to court in 2001.

Sorry to be emotive, but it really is just a bad, bad, joke.

> What are the effects of the restrictions on:

> (b) clients and the general public;

Clients are seeing a shortage of the skills that they need to help their businesses meet the challenges of e-business. This was already the case before IR 35, and has been exacerbated by the measure.

Clients are finding small consultancies more expensive as they hedge against the risk of IR 35 exposure. Clients are finding small consultancies less flexible in their working practices as the consultants strive to "prove" their independence to the Inland

Revenue.

So far as clients are involved, IR 35 has reduced flexibility and driven the cost of scarce skills upwards, fuelling inflationary pressures.

The general public is not affected by IR 35 except insofar as:-

(a) they suffer the small inflationary impact, and

(b) the opportunities for potential entrepreneurs are closed off.

> What are the effects of the restrictions on:

> (c) the range, quality and price of the services available?

Range: The legislation may actually encourage the consultancies which survive to provide a wider range of services in their totally artificial quest to prove their independence to the Inland Revenue.

Quality: Impact generally neutral, but could be adverse where small consultancies have been artificially forced into "fixed price" contracts by IR 35, whilst their bigger, fatter brethren can offer "time and materials" with impunity.

Price: Small consultancies' rates need to rise typically between

25% and 40% to preserve profitability if their work is (eventually)

deemed to be "disguised employment".

Thanks for your interest, and the best of luck with your endeavours.

Bill Webster

Director & Principal Consultant

Plan Dynamics Ltd

IT Strategy & Project Management

Phone/Fax: 01606-301122

Mobile: 0374-628097 bill.webster@plandynamics.co.uk