Hewitt tells select committee small firms have not raised IR35

Article appeared in Computer Consultant, 2-16 Feb, 2001

Text of article

Calm before the Storm

Government ministers are becoming increasingly economical with the truth when having to answer questions about IR35, as Susie Hughes, of the Professional Contractors Group, reveals.

Addressing a Select Committee, Home Secretary Jack Straw metaphorically placed the telescope to his blind eye and stated that there was no evidence of people leaving the country due to IR35. Then Paymaster General, Dawn Primarolo, side-stepped questions about the costs of the judicial review*. And most recently, DTI 'e-minister' Patricia Hewitt has been choosing her words with care when talking about the Treasury's 'stealth' tax.

At a DTI Select Committee just before Christmas, the e-minister - who has faced considerable lobbying from individual contractors and the Professional Contractors Group (PCG) - dismissed claims that small and medium-sized enterprises (SMEs) were concerned that contractors going overseas as a result of IR35 would leave them with a skills shortage that could not be filled.

She said: "I do not think I have had any small businesses raise IR35 with me. I have had a couple of large businesses saying they have lost a few contractors as a result of IR35. I recently spoke at a main session of the CBI Conference on e-commerce generally, a big panel discussion, and nobody raised IR35."

Dismissed

Hewitt then dismissed the idea that contractors were leaving the country in any significant numbers. She told the committee: "If you look at one of the contractor's websites, you will find a monthly survey of the number of IT contractors who have left, or are planning to leave, the country. On the most recent one I have seen, there were about 78 contractors who were planning to go to Germany or had already gone, there were about 48 who were planning to go to the Netherlands or had already gone, and around the tens or twenties in a handful of other countries.

"You will find the German Government is already taking steps against what they call disguised employment, fraudulent self-employment; the Australians have introduced a very similar law; the Americans, and other industrialised countries are taking steps to protect the integrity of their tax system and ensure there is fairness between employees who are paying not just income tax but also national insurance contributions and people who, although they are doing the same thing as the employees, have managed to route their income through a personal service company"

The PCG has constantly complained that the Government failed to consult with interested parties in accordance with its own guidelines. However, Hewitt added: "Of course we are monitoring the situation very closely, we have not yet got to the end of the first tax year in which IR35 has been in force, and I know colleagues in the Inland Revenue have been working very closely with the contractors' group and other parts of industry to ensure they are giving as clear guidance as they possibly can, so people know whether they are still in fact self-employed and able to use their personal service company for self-employment, or whether in fact their contract falls on to the employment side of the line."

"Obviously I am aware of the concerns of the Professional Contractors Group and of the judicial review. We will see what decision the court comes to."

However, it seems Hewitt chose to ignore the views of one contractor who emailed the e-minister to explain why he had moved to Holland as a result of IR35.

In the email, the contractor explained: "The market for my skills is, in a very real sense, a global village; there are no barriers preventing me from working anywhere in the world. With very great reluctance, and only because safeguarding the considerable investment of my own money in my own business became necessary, I have moved my successful and growing business to the Netherlands.

"The increase in my tax bill under the new regulations covering service companies was not the prime motivation; in fact the personal taxation rates in the Netherlands are higher than the UK. I moved to the Netherlands to protect everything I have worked for. All of the income that I generated as a contractor in the UK was re-invested in developing a business of my own; the new tax regime introduced by this Government destroyed my ability to fund the development of my business from my earnings as a freelance contractor."

Invest

The contractor continued: "I was never a dodger or a cheat. I was not a Friday-to-Monday case. I always paid the correct PAYE and NI on my income. Yes! The Netherlands has regulations similar to those which have been introduced in the UK. Yes! I now pay more tax on my income than previously was the case, but, at least I am able to charge all legitimate business expenses against my tax liability and at least I am able to invest retained profits in growing my business.

'A tax regime that frustrates and prevents clever people from investing their company's earnings in wealth creation and innovation can only be a disaster for the UK economy. Skills shortages are here now. Shortages will only increase. There is a serious shortfall; and the IR35 measures can only make it worse. Thousands of companies will close; thousands of resourceful, inventive and highly skilled people will leave the country. I am now one of them."

*The PCG is challenging the validity of IR35 in a judicial review in the High Court on March 13-15 2001.

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David Hopkins