Reader tells the OFT that IR35 is closing knowledge based businesses
Email Sent:
To: 'professions.review@oft.gov.uk'
Subject: Consultation Process on Competition Policy.
Grahame,
I would like to draw your attention to a piece of legislation which the current government are well within their powers to change, as it is not yet law. It is causing huge amounts of uncertainty in the small business community. Its own RIA accepts that it will close down tens of thousands of small businesses, the majority of which are in the all-important IT sector, the darling of new Labour, if you are to believe the spin. That measure is the IR35 legislation cloaked in the Finance Bill 2000.
To address but two of your questions.
Question 12:
IR35 has already negatively impacted the delivery of professional services in our sector. We currently term ourselves as knowledge based workers, we make nothing that it is possible to pick up and touch, we use no special tools other than standard computer hardware that anyone can buy on the high street for a few hundred pounds. Many people find it hard to even understand what it is that we do, but we play a vital role in modern industry and that is reflected in the demand for our services. The Paymaster General herself, champion of this legislation, will admit to not even knowing what a knowledge based worker actually is, and yet she sees fit to tell us in no uncertain terms, how to run our businesses and what we can or cannot invest profits into. I have already spent many chargeable hours negotiating contract terms with my clients in an attempt to pull myself clear of the huge grey area that this legislation has created. If I and my peers had been left to get on with what we do best, this time could have been used to the good of the economy and the country in general. Our freedoms to deliver solutions to our clients in the most efficient manner possible are being eroded. Clients are caught up in this uncertainty. Projects are being negatively impacted or shelved. Costs are being passed on to end-consumers. This is only the beginning.
Question 13:
This is easy, this question must have been phrased with IR35 in mind! The objectives of the legislation are to boost treasury coffers by removing any taxation incentives to self-employment from an ever increasing number of personal service companies. The effect of the legislation is akin to using a sledge-hammer to crack a nut. As described above, the uncertainty caused is already negatively impacting the flexible knowledge based work industry. Competition is a sore point as small IT consultancies cannot compete on a level playing field with large ones, who are exempted from the measures. Investment in computer hardware, training and the opening of new revenue streams will all but cease for most of these businesses. My preferred solution would be for the treasury to remove IR35 from the finance bill and replace it with a change in the taxation of dividends paid from profit generated from revenue received in respect of fees earned by the shareholder. In other words, change the treatment of dividends from unearned income to earned income if they result from work done. Charge full PAYE on them as if they were salary. No-one in the industry would realistically object to that. IR35 is over-Kill with a capital K.
Some of the more negative effects have already been mentioned. The freelance contractors are either in a state of confusion, a state of denial or a state of depression. The confused may remain so for a while, then move to one of the two other groups. The ones in denial will likely be listed as bankrupt within a couple of years. The depressed are acting to either leave the reaches of the UK tax system, change working practices in a big way or to go into permanent employment and give up their ambitions. Over 20,000 IT workers have vanished, this year, despite the government's best efforts to replace us with cheaper imports from the east, marketed and exploited by the big foreign-owned consultancies. Clients are suffering from reduced choice and availability, costs are rising, especially in e-commerce, and many clients fear that contractors, incorrectly labelled as disguised employees, will start claiming employee benefits from them. The general public are the end customers who are paying for all of this.
My message to Dawn Primarolo:
IR35 should be replaced before it becomes law. Tax legislators should stick to doing just that and leave us alone to run our businesses the way we see fit. Charge us tax and national insurance on all that we earn by all means, but don't mess up our industry altogether.
Regards,
Carl Thomas