IR35: Defeat from the jaws of victory?
As the dust settles on the recent Budget, questions are being asked as to why the abolition of IR35 never happened.
After years of being told that the Conservatives and LibDems were sympathetic to calls for the end of IR35 and that private assurances given to those 'in the know' behind closed doors meant its days were numbered - what happened to create a U-turn at the 11th hour 59th minute? Or was it never really on the cards anyway?
Philip Ross, a former external director of freelancer trade group, the PCG, and Labour party supporter has been part of the campaign against IR35 from day one. He looks at whether this is a case of 'snatching defeat from the jaws of victory'.
Philip Ross writes:
Philip Ross at Labour Party Conference I had the abolition of IR35 down as one of those things that the Tories would do in their first 100 days in office. Something they would symbolically ditch to keep faith with their supporters and show that they could be trusted to keep their promises. Labour had had its big bash in its first 100 days in office back in 1997. Union rights were restored to GCHQ, the minimum wage was brought in and privatised utility companies coughed up the windfall tax. They should have carried on of course and shown the courage of their convictions and banned fox hunting and properly reformed the House of Lords. But no, instead after years of faffing about we ended up with some leaky legislation on hunting with dogs and the scheme where the sons of Bertie Wooster could continue to sit in the House of Lords.
The Tories have just had their moment with IR35 and have blown it. Sir Humphrey has persuaded them to put caution before principle. The setting up of the Office of Tax Simplification was a welcomed move and the budget decision to consult on merging tax and national insurance a bold and courageous one.
Indeed I am working hard to persuade Labour to back this move and ensure that we can get a tax and benefits system that works for a knowledge-based economy and the 21st century. Yet, in terms of IR35 we can now see that they were a means of kicking the whole subject into the long grass. At best freelancers hoped for abolition of the tax, expected reform but instead got nothing but tepid words about working more closely together with HMRC. It sounds like a bad joke but the reality dawning on contractors is George Osborne's U-turn on IR35 is one of bitter disappointment.
During my spells at the PCG, firstly as External Affairs Director and later as their public affairs executive we spent a lot of time working through the Gordian knot that is IR35. Obviously the main solution was an Alexandrian one of just slicing it with a sword, but how did it get so tangled up in the first place and how could we stop this from happening again?
The problem was and is our antiquated tax system that the High Court judge on IR35 commented was one as resembling more of a 'master/servant relationship' than anything else. It is over 100 years old and is not fit for purpose and the need for IR35 is a classic example of why.
As people know, having been forced to incorporate as one-person limited companies freelancers unable to work as Schedule D (self-employed) found themselves facing a corporate tax regime and the ability to pay themselves via dividends. Which they did. They then found themselves accused of tax avoidance, which is more than a little unfair.
Labour did introduce Limited Liability Partnerships (LLP) which recognised the need for partnerships to incorporate. At the time I argued to Patricia Hewitt why not have limited liability self-employed? At a stroke I suggested it would solve many of the problems and the need for IR35. But Labour weren't ready for such a blue-sky thing at the time and for them it wasn't a priority, why deny themselves the supposed huge tax yield that HMRC promised that IR35 would deliver? (Indeed isn't this the same argument behind George Osborne's u-turn on IR35?).
We never got very far with this because I knew it would be difficult to sell to many of our hard-core PCG members. 'Labour', I was told would be 'out of office at the next election and there was no need for any compromise'. The Tories would come and everything would be fine. That was in 2003, now eight years later after a bucket full of pledges from succeeding Tory leaders and Shadow Chancellors, the failure of that argument is plain for all to see.
Surprised
Still I am both surprised and disappointed that this has happened. I had applauded when the Tory-led Government had scrapped the plans for identity cards and I had hoped to raise a glass to the abolition of IR35 too. I thought it was a done deal.
The whole moral and economic argument against IR35 had been won long ago. The Government's estimates on how much revenue it would raise were fanciful to say the least. Back in 1999 we were told it would raise £700m and the only cost would be a £50,000 help line number. HMRC steadfastly refused to count or monitor how much money it did bring despite numerous parliamentary questions. The only successful one revealed that between tax years 2002/03 and 2007/08, IR35 directly raised just £9.2 million.
This equates to an average of around only £1.5 million per tax year – a tiny sum in Government tax terms and a fraction of what the Government expected. Yet HMRC has still managed to persuade George that it is 'a significant revenue stream'.
The PCG shouldn't be letting the Tories off the hook, just because they may have been friends once. My advice to the PCG would be to make them stand up what this 'significant revenue stream is', is £1.5m per year a significant sum? Or if there isn't a big revenue stream for Government is there one for someone else?
Back in 1999 it was the big consultancies that were fed up of being undercut by freelancers that argued for it. Now in 2011 they are still arguing in favour of it but are joined now by the whole industry that has sprung around supporting it IR35. I believe that there are more strong and powerful vested interests in keeping it than in binning it.
Tough questions
I hear that people believe that the PCG is too close to the Government and is afraid to criticise it. I don't know how true this is but I recognise the accusation as it was levelled against myself long ago as a Labour supporting member of the PCG. If it is true then the PCG needs to find a new vein of courage, like that of the founding members and activists some 12 years ago.
There are some tough questions that the PCG need to be asking, they need to be holding the Government to account and make them keep their promises. There is no point in having a seat at the table if you keep quiet.
They need to understand that you can criticise the Government of the day and – to quote Barack Obama – you can 'disagree without being disagreeable'. Do it well and they will respect you, do it better and they will both fear and respect you. If you don't do either then you will have failed. Labour may not have liked our old-PCG but did both fear and respect it.
The fight for abolition of IR35 didn't end when David Cameron was elected as George's U-turn has shown. IR35 won't be reformed through an act of charity or through Tory paternalism but it will be reformed by activists pushing hard for change. True you can wait for the full reform of the tax system which Labour will complete when back in Government. But both parties need persuasion.
Contractors and the PCG should realise that only by winning both the social and economic arguments on small business and freelancing can they hope to persuade both Labour and the Tories of the need for change. George's U-turn shows he never really understood the arguments before and we now have Labour in listening mode. They all need help. It is an opportunity and the prize is the ability to shape and win the political consensus - it is not a time to give up.
Philip Ross
Philip Ross is the founder of the Labour Small Business Forum, a network of Labour party members who work for themselves. A former IT freelancer, Philip has campaigned actively on behalf of freelancers and small businesses. At Labour Party Conferences, he has chaired fringe meetings and spoken from the platform in support of clearer and fairer policies for small businesses. He continues to be actively involved at many levels within the Labour Party.
Philip led the team which successfully campaigned to have IT skills removed from the Skill Shortage list.