IR591 could trigger shortage of IT and engineering experts

The threatened tax blow to freelance contractors in the Budget (March 17, 2004) could restrict the mobility of labour and lead to a serious shortage of skilled experts, according to the JSA Group which manages the financial affairs of over 4,500 contractors in the UK and overseas.

The Treasury has been trailing what has been described as a Budget time-bomb, that will ensure owner-managed businesses pay, what it describes as, 'the right amount of tax', leading to a variety of differing speculation and rumour about the method that might be introduced, but universal acceptance that it won't be good news for small businesses.

Barry Roback, Chief Executive of JSA claims that many contractors, who the Revenue accept are genuinely self-employed, acquire limited company status to benefit from the tax and NI advantages that are currently available, particularly after the 2002 Budget when the starting rate of Corporation Tax was reduced to nil.

Some thought at the time that the Treasury had not really intended to offer this tax advantage to the one-man business, but the Inland Revenue insisted that this policy was deliberate and designed to encourage an entrepreneurial spirit.

Disjointed thinking

Barry Roback, who is also one of UKTECH's Ask An Expert panel, said: "It would appear that two years later, the Treasury has changed its mind.

"In a typical example of disjointed Government thinking, the result of these impending tax changes will be that fewer specialists will be tempted into the world of freelance contracting, leading to a less fluid labour market and economic stagnation. Ironically, the Revenue is proposing to introduce these changes at a time when there has been a noticeable increase in demand for independent contractors after a lengthy recession in that sector."

According to Roback, many organisations now realise they cannot put off investment in technology any longer and are looking urgently for specialists at all levels. He points out that the UK has the most mobile and least restrictive skilled labour market in Europe, which over the years has attracted considerable overseas investment.

He added: "However, it would seem that the Treasury is in danger of losing this advantage by increasing the tax and bureaucratic burden on those who are prepared to take the risk of self-employment. Although the Chancellor insists on keeping us guessing, his likely intention is that dividends derived from the typical one-man personal service company will be subject to some kind of investment income surcharge or perhaps National Insurance, in much the same way as a PAYE salary."

"Not only will this have a material effect on a freelance contractor's overall reward package, it may also trap them in a potential taxation double whammy. In addition to a Corporation Tax bill for last year's profits, this year they must also fund the additional tax and/or NI that will become due under a new regime."

Nurtured not neutered

Barry Roback stresses that of all professional groups, knowledge-based contractors, particularly within the IT and engineering sectors, have probably been hit hardest by the Government's revolving door approach to tax.

"They first attracted the attention of the Revenue during the dot.com boom when reputedly many left their PAYE jobs on a Friday, only to return the following Monday as self-employed contractors, reputedly doing virtually the same job as before. In reality, this seldom if ever was the case, but it did reflect the entrepreneurial spirit of the time. Not surprisingly, the Revenue found the Klondike atmosphere that prevailed distasteful and felt the need to step up their interest in the self-employed.

"Although, Downing Street and its DTI allies appear keen to promote entrepreneurial get-up-and-go UK plc, the Treasury seems determined to snuff out any flicker of enterprise.

"Freelance contractors have a vital role to play in our service-driven, highly mobile economy. They deserve to be treated with respect by the Chancellor and given more consistent tax treatment. They are the geese that have laid the golden eggs for the Treasury and they need to be nurtured not neutered by thoughtless and disjointed thinking by the Inland Revenue. Many threatened to leave for jobs abroad after the introduction of IR35, but after this Budget, those threats may well become reality unless the Chancellor decides to give these vital contributors to UK's recent economic success a fair deal and leave the tax rules on limited companies alone."

This threatened change coincides with the Chancellor's recent announcement of an ambitious investment plan to bolster the UK's engineering and science performance.