IR35 expects new firms to start with 21 shareholders, OFT told
I have sent an appropriate letter to both parties. Additionally, you might like to know that the Small Business Services site apparently has no mention of IR35 as the search facility drew a blank. Says it all really.
Here is copy of letter - rather long but this is a serious subject which impacts on many aspects of the delivery of professional services and the UK's competitive position. Please note that some names have been changed to protect me or UKTECH from being sued for libel.
Subj: Attention of Graham Horgan
Date: 6/29/00 11:41:27 PM GMT Daylight Time
From: PEdwards99
To: professions.review@oft.gov.uk
Graham,
Please accept my views regarding the following:
Question 12: Are there any other ways in which you consider the delivery of professional services to be restricted?
IR35 restricts the delivery of professional services as stated below.
Currently independent suppliers can compete against larger companies on quality and price, due often to greater expertise and also because of lower overheads. The client receives better value at lower cost from independent suppliers than from larger companies. There is also less opportunity for cartels of large companies to develop and this of course also allows for greater competition in price and quality. All of this is for the good of UK competitiveness both home and abroad. Please observe the success or failure rate of XXX and BB to validate this statement. In the IT Industry they are notorious for poor value and over priced non-delivery.
IR35 effectively prevents a small supplier delivering a service in the same manner as a larger competitor - the smaller supplier could have a staff member sat alongside a larger company employee at the client workplace under the same terms & conditions, and yet the smaller competitors cannot retain profits for expansion, for employee benefits and training, and is forced to pay a very high % of revenue over to the Inland Revenue. None of which applies to the larger supplier.
IR35 not only acts as restraint on trade NOW, but effectively prevents the seed corn of the industry growing. Examine such firms as Cap Gemini and others. You will discover they were founded by a couple of skilled professionals. IR35 expects a new company to START up with 21 or more working shareholders else it is treated for tax purposes as an employee of the Client - but does not receive employee benefits from that relationship nor can the small supplier company now provide them to its employee-shareholder. The company cannot expand and employ additional staff as their salaries are deducted after IR35 tax, and when they also pay their National Insurance and income tax double taxation occurs. A recipe for insolvency.
Only knowledge workers have been targeted for this, makers of widgets and paper bags are ignored. Smaller supplier knowledge worker companies are in demand the world over and are highly transportable. IR35 is an own goal for British Industry and Commerce made by a government with no understanding of small business and certainly no understanding of how the knowledge industry works nor how it is critical to Britain's future success. Joined up government it is not.
Question 13: What do you think are the objectives of the restriction? Do you think these purposes are justified? If yes, please state the justifications.
The objective of the restriction was supposed to be stopping Friday to Monday conversions driven by the big companies and forcing dependent employees into self-employment. This measure is an inappropriate response to this issue. I have spoken directly with senior Unison officials who deny that this is a problem for them. Their issue is public sector employees being forced to work for larger private contractors who do not give them the same benefits as obtained previously. IR35 does not address this issue. Indeed, where the employee is forced to set up his own limited company, IR35 effectively prevents him from providing his own company employee benefits whilst no longer receiving them from his previous employer. Trades Union officials have roundly condemned IR35 as offering no employee protection. I would suggest that the Employment Tribunal system would be more appropriate.
If you want to see where 'workers' are being exploited in this industry look no further than the public sector and I include such newly 'commercial' companies such as BT and the Post Office in this remark. BT uses some 2,000 or more knowledge workers, imposes unilateral conditions on them which enforces an employee like relationship on the small business but does not provide BT employee conditions of service. Many government departments use the same arrangements which are exploitative of the small supplier.
Standard conditions of supply enforced on small suppliers by such as BT are a restraint on trade. Now - if you want to liberate the knowledge industry and other small suppliers from 'oppression' why not review BT's so called standard conditions for small supplier services - which you might like to know do not apply to the large suppliers such as AAA and BB. Investigation and correction of such onerous contracts comes within the DTI not the Inland Revenue.
While you are at it, why not review the contracts enforced on small suppliers by the industry contract finders the Agencies. They themselves confuse us with employees and try to enforce onerous contracts on us more suited to employees than independent suppliers. Again a role for the DTI not the Inland Revenue.
A secondary purpose of IR35 is unspoken but I believe that the Inland Revenue is trying to reduce its company workload by closing down small businesses. Since big business has concentrated on its core interest non-core supplies have been outsourced to hundreds/thousands of small businesses. Big business and the UK is gaining a competitive advantage by this, additionally many small businesses are starting in previously underdeveloped areas and this again is a UK advantage.
However, this has generated an increased work load for the IR and the Customs and Excise (VAT) in dealing with many more small businesses. The answer is not to close these small businesses down (66,000 businesses to close and 250,000 severely damaged - IR statements) but to streamline IR procedures and simplify taxation so that the work involved is less. Both long overdue requirements according to the Institute of Taxation and other professionals involved in accounts and taxation affairs.
A third purpose of IR35 is hinted at - namely IR35 is an attack on small business of any sort to limit their ability to retain profits and pay dividends in line with larger companies. The building industry is in disarray from their equivalent of IR35. Large partnerships and companies can arrange profit distribution and dividends to suit themselves - only the smaller company is attacked in this manner.
The Inland Revenue and this government do not understand that less tax is more tax. Note that the US is extremely lightly taxed, Hong Kong when under UK rule had the lowest taxation and highest per capita income in the world, Singapore is thriving with a 5% tax. However, the EEC - a firmly socialist/bureaucratic structure has higher unemployment, the Euro is suffering partly because its citizens are investing in the states and partly because they are uncompetitive. IR35 has been on the Inland Revenue shelves for nearly 20 years and the previous administration, more worldly wise than this government, threw it out.
Big business always has a seat at the table of Government, note that AAA chairs the Government committee on Technology and yet the Professional Contractors Group with over 10,000 members is not invited. The Inland Revenue invites big business to discuss tax collection procedures - I see no mention of it doing similarly with small business trade associations. The Inland Revenue should bring small business organisations into discussions regarding tax simplification.
The fourth purpose is to raise more in National Insurance Revenue. This is a mistaken belief borne out of ignorance of the knowledge industry. For example - say a small supplier can deliver a service for £100k per staff member. If that staff member was forced into employment with a client their pay is likely to be about £50k (assuming they are not over 45 yrs of age as many are, in which case no big company will take them on - move directly to social security costs).
There is an immediate loss to the exchequer of VAT and Corporation Tax at least on the difference and probably more. If the small supplier retains his company he cannot provide training (in the knowledge industry?), technical equipment and employee benefits nor can he provide for lean times. IR35 is likely to result in companies trading insolvently and closing - all as targeted by the Inland Revenue under the mistaken belief that there are tax gains to be made.
It is worth considering that the US is taking out their equivalent of IR35 because it has damaged their industry, Germany has stopped implementing it for the same reason and Australia has severely limited its scope. A clue surely.
Do you think that the restraints are more onerous than is necessary to meet any justified purposes? 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 restraints are totally inappropriate as mentioned above and therefore the question of severity is not applicable. Use the Industrial Tribunal system for defending employees' rights and the DTI for unlawful restraints on trade and one sided contracts.
What are the effects of the restrictions on:
(a) the profession and its members;
The knowledge based profession is likely to be severely inhibited within the UK. The best companies are likely to go abroad in order to expand. Comments by the French equivalent of the DTI have stated that those companies which flee France for tax reasons do not generally return and are the Entrepreneurs.
Polls have indicated some 40% are currently organising their departure, 1% have retired, and about 8% have gone to work directly as client employees (note loss of tax revenue resulting mentioned below). Others (about 20%) have withdrawn from the knowledge market to develop other business interests. My business has effectively ceased to trade since February, 2000 because of IR35. I estimate the loss to the Exchequer of approximately - £8,000 in VAT, Corporation tax on £45k (what ever that is), Income tax on £5k, and Employers and Employees National Insurance on £5k. A meeting I attended recently showed 4 out of 10 small suppliers had also withdrawn from the market.
I am moving into other business areas not covered by IR35, not in the knowledge based area, and at lower value both to me, the client, the Inland Revenue, and UK Ltd.
I will not accept the effective dismembering of my business by the Inland Revenue and IR35, and will move into other business areas.
(b) clients and the general public;
The impact on Clients is a restriction on skills available and an effective quadrupling of cost for the same value. An independent knowledge based company can deliver top quality expertise at say about £1,000 per day, the cost to the client of the same expertise (if available) is likely to be over £2,000 per day from AAA or BB. The reality is the AAA or BB actually deliver a skill set substantially lower than the independent supplier and generally charge about £1600-£2,000 per day. To sum up: a doubling of costs, a halving of quality resulting in a net value of a quarter of the independent supplier. These figures can be verified by anyone in the industry.
Skilled practitioners moving abroad will leave commerce and business devoid of the business benefits of IT. For example I know that an IT Independent Consultant has left the city of London (private banking), with spouse and children, because of IR35 and is currently in Zurich resourcing some 24 UK independent consultants for a 2 year project. Once that is in, this business facility, instead of being in the City of London alone, will also be in Zurich competing directly with the UK.
It is a popular misconception that IT specialist companies sit and 'play' in some esoteric corner of a company while the real business is done elsewhere. Additionally with so many people able to use such package software as Microsoft Office they all think they know what IT is about.
This industry requires highly intelligent, well trained, experienced and advanced technology workers - it is not a place for well meaning amateurs who have had a few weeks training. The knowledge industry delivers competitive advantage to the UK enabling us to compete in the Global Market with our commercial and business services. The lack of IT skills in the City threatens the entire success of the UK and all our 'jobs'. The lack of IT skills in manufacturing inhibits technology advances, automated coding and robot technology.
The general public may find itself, going to the US to buy from E-Commerce sites, having to buy foreign insurance and investment products, will find itself buying cars and equipment with foreign coded components, and in the extreme case will have only low value jobs in low value industries.
Why do you think that over 100 Japanese companies have established R&D companies in the UK. Why do you think Microsoft have established research facilities in Cambridge. Both these industries are likely to suffer an increase of some 30% on knowledge based costs and a shortage of skills - a sure recipe for reconsidering where they do business resulting in fewer and lower quality jobs.
Do you realise the UK business will find an increase in costs even within their own IT departments. The likely result is that any company with international connections will move its IT department to a more favourable Tax Environment - with a loss of jobs and skills. Note: Cisco, Oracle and Zurich removing investment from the UK because of IR35 and other tax changes, and Vodaphone also questioning the UK's tax environment. The first three companies have removed some £860 m investment from the UK and with that investment goes top quality technical jobs.
(c) the range, quality and price of the services available?
Large business will lose skilled IT resources, with the reduction in the numbers of independent supplier companies the range and quality will drop and the price increase. Hardly likely to result in a strengthening of the UK's competitive position.
To sum up IR35:
Will limit competitiveness by encouraging cartels which will increase UK prices,
Supports existing large suppliers and inhibits the growth of smaller competitors leading to industry stagnation - the usual result of cartels and a high critical entry point into an industry,
Will encourage smaller suppliers to move overseas offering their competitive business advantage to other countries
Will encourage some specialist suppliers to deliver services overseas in a manner which cannot be traced ie via the net,
Will reduce the pool of highly skilled technical professionals through a reduced attraction to form own business and permanent emigration (see Computer Weekly - Where have 30,000 IT Professionals Gone to? and www.UKTECH for surveys of small company decisions) and hence inhibit British Industry, British Commerce and British Finance in their competitive Global position.
P. Edwards, ACMA
Vice President of the British Association of Women Entrepreneurs
Director of the Professional Contractors Group Ltd