Software house director says IR35 blocks share awards and site working

Dear Mr Horgan

A REVIEW OF COMPETITION RESTRICTIONS IN THE PROFESSION

I am writing in response to the request for comments in the above Consultation Document.

I am a working director of a small software house which typically employs around 10 people.

I would like you to consider the anti-competitive and unfair restriction placed upon my company by the IR35 legislation.

Until the introduction of this legislation, we were free to have our employees and myself work on client sites, to continue contracts with customers for as long as they continued to make good business sense, to reward employees with shares (most have about 4-5% of the company), to invest in computer equipment and training and to pay myself and my employees a salary based on commercial decisions.

With the introduction of IR35, most of these standard business practices are restricted - unfairly making it difficult to compete against larger companies which are not affected by such legislation.

On a point by point basis:-

Having our employees work on client sites increases the likelihood that they would be 'caught' by IR35. Having them all work at our offices gives us significant space problems. Result: Increased overhead and reduced competitive ability.

The length of a contract is now a factor for IR35. As a result we will have to decline repeat business and move on to other contracts. Result: Our new markets will be required just to maintain our current turnover, reducing our growth.

Rewarding employees with shares, even under approved Government schemes, will bring them into IR35 by definition.

Where a contract is deemed to fall under IR35, capital allowances against computer equipment and training are disallowed. Result: Our employees will be less effective and therefore less competitive.

Finally, under IR35, I no longer have the genuine option of determining salary levels on a purely commercial basis. We would be forced to pay tax on 95% of our income as if it were salary. If it is not subsequently paid out as salary, we would be forced to pay Corporation Tax on it as well. Result: we can only retain profits in the company at a vastly higher tax rate than unaffected companies. ie. every £100 we generate would typically be carried forward into the next year as just £38.40 instead of £80 for an unaffected company. Result: serious impact on growth, R&D, marketing etc.

If you are interested in alternative solutions to the problem that IR35 was purported to solve, there are many - unfortunately they are probably politically unappealing. I offer you two simple ones below.

1. Abolish Employers NI and adjust Income Tax to compensate. Tax neutral measure that would prevent abuse of dividend payments.

2. Subject dividend payments to 12.2% 'unearned income' tax.

I earnestly hope that you will review the genuine effect of this legislation, including the uncertainty caused by it, rather than the "spin" generated by the Inland Revenue and HMG.

Yours sincerely