Reader tells The Times the 5% expenses limit starves knowledge firms

Andy White asked me to post this email to The Times as a comment to this article.

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The IR35 proposal, press release no. 35 from the Inland Revenue, proposed changing the tax regime for freelance staff who operate through their own "personal service companies" and who work in a situation where they would normally be considered an employee.

These proposals were brought in for two main reasons:

1) to protect workers in manufacturing industry from being sacked on a Friday and forced to return on a Monday as freelance or contract workers - with the reduced benefits and rights that go with that, including no paid holiday, sick leave, maternity leave, training, redundancy, etc.

2) to catch those highly paid freelance workers in the knowledge based industry who, through dint of operating their own personal service companies, are able to pay themselves as little as the minimum wage while taking the remainder as a combination of expenses and dividend - which has been seen to grossly disadvantage permanent employees with whom they work.

Existing law and case history allowed director/shareholders to choose the salary and dividend levels they paid themselves, and so did not enable the Inland Revenue to cover these areas, so changes were proposed, some of which have already been passed into legislation with the Finance Bill earlier this year.

The changes, however, now mean that freelance and contract workers have their company's income taxed as if NI and PAYE were applied at the point of invoice (i.e. on the payment between their client's company and their own). In an attempt to quieten the growing unrest at this draconian measure, the Inland Revenue announced they would allow up to 5% expenses on the gross income of the personal service company - which they considered a reasonable amount. Any real company in the leading-edge knowledge-based sectors, however, has to spend a great deal more than this on new equipment, software and training.

As for my own situation. I now run a successful e-commerce, consultancy and hosting firm (Psi-Weavers Limited) with two other partners, which has an exponentially growing client-base (so far through recommendation and personal contact) which in the first six months trebled in staff size and exceeded our forecast for the whole of the first year (which was a stretch target in the first place).

If the IR35 proposals had been in place over the last five years during my contracting career, I would not have been able to save and invest in the equipment, office-space, and staff to make launching our company even a faint possibility. So although the IR35 proposals do not and will not affect us, as a Labour Party member, an ex-contractor and a successful business person, I feel moved to speak out on this.

Let the situation regarding personal service companies be reviewed and be made stricter, but do not let them choke the life out of fledgling companies in a sector which our government has pledged it wants the UK to be a world-leader.

Yours,

David Greenmoor.

Psi-Weavers Limited

"e-business is our business"