UKTECH Poll: How has IR35 affected your company?

Over 1,500 votes were cast in the latest UKTECH survey. The purpose of the poll was to assess the effects of IR35 on the wider UK economy, depending on how individual contractors were behaving as a result of the new tax measures. Previously UKTECH surveyed which contractors were overseas, or were planning to go, but this survey examined the actions of those who are staying in the UK. Against the claims of the Regulatory Impact Assessment (RIA) the results show that IR35 has had much wider consequences than the Inland Revenue could ever have imagined.

In a previous poll 1,143 UKTECH readers voted that IR35 could cause a potential Brain Drain. Our April survey showed 15% already overseas, 37% waiting to go and 44% certain to stay. The Revenue's RIA took no account whatsoever of those leaving. Just as important, the RIA ignored a range of options and suggested that contractors would carry on as before, and pay more tax. Our survey showed that three quarters of contractors have chosen not to carry on as before.

The votes were: Total 1,520

1. Close limited company and return to permanent employment 8%

2. Close limited company and retire 1%

3. Unable to find suitable contract at present (ie not working) 11%

4. Working less and taking more holiday 23%

5. Working less for client and more on 2nd income 19%

6. Other 7%

7. Change contract and carry on as before 27%

Whilst the immediate thought is that over one quarter of all voters are carrying on as before, with a change in contract terms where possible, this obviously means that three-quarters of voters have modified their behaviour in some way.

The poll shows that 8% have returned to permanent employment. Obviously the survey is representative of UKTECH readers, not the UK contractor population. However, if 8% of UKTECH readers have taken this option, it is a fair assumption that more than 8% of contractors have acted in this way – and given up reading contractor based websites. The consequences of returning to permiedom are illustrated by voters' comments:

By going back into permanent work I hope to help shrink the economy, not only have they taken a whole heap of money out of the economy by IR35, I have reduced my income considerably. Mr Blair, that will mean, no more spending in garden centres, no more spending on weekend breaks, no more spending on pieces of art, no more spending on designer clothes and no more spending on electronic items.

1% of respondents are closing their companies in order to retire. This is probably representative of the wider contractor population.

Unhappily 11% of voters are currently between suitable contracts. UKTECH has reported elsewhere on the marked difference in demand for new economy and legacy skill-sets. Of course, whilst contractors are between contracts they are not contributing to the Revenue coffers. Hopefully most are making use of this time to refresh and develop new skills.

Refreshing and relaxing has become a priority for almost a quarter of voters. 23% are working less to take more holidays, spend time with families etc. The main reason seems to be the lack of incentive to work. If the flexible workforce decides to opt out, it is potentially very damaging to UK competitiveness, if other nations are building their economies:

I started contracting a couple of years ago and did a fair few extra hours, which were taxed at 20%. Now any extra hours are taxed at 52% so frankly I can't be bothered. Surely the Inland Revenue and the Paymaster General must realise that a tax regime invented for people on fixed salaries is not best suited for those who effectively choose the amount of work they do.

Due to IR 35, and all the other 'hidden' taxes I am now forced to pay, I can't see the point in working the same hours per week as I did ten years ago, for less take home pay. I have sold my house and will be moving overseas at the end of June this year. I really do hope that a lot more people follow suit

Over the past two years I've worked an average 50+ hours a week, away from home, putting up with traffic congestion, early rises, late finishes, incompetent officials, tax demands, interest on tax demands, etc etc etc ... The new 'rules' convince me there is little point working as a PSC for a single client in UK since it looks like I would pay around 52% of gross earnings to a government that looks set to squander it anyway.

Other contractors have taken the opposite view, and are possibly working more hours as they seek to build up other business interests. 19% indicated that they are building second income streams. However this positive action is a long-term risk that is affecting the UK today:

So far the effect of IR35 on me has been to reduce my company's income by about 60% whilst I try to set up a different business. That means that the taxman will get a few thousand less in May 2001, but he won't notice yet. Meanwhile, I've stopped spending on anything unnecessary, so there's less VAT being collected too, and I've minimised my pay, so less PAYE as well.

7% of voters ticked the 'Other' option. At least 10 voters commented that they were planning to take work overseas, or had already done so.

I will do whatever it takes to avoid losing out to IR35: changing contracts, changing work practices, upping my rate, or working abroad. For now, I am on holiday and the treasury is getting no tax at all from me.

I will not work under present conditions past this summer. (I can't afford to have investment in equipment and training taxed as income).

My response to IR35 has been:

- to decline any conventional agency contracts longer than a month, unless there's some strong fringe benefit from them, e.g. I'd gain new skills there or it's right on my doorstep (I haven't had any yet)

- to concentrate on my freelance (non-IR35) consultancy clients

- to actively pursue genuinely non-IR35 work patterns (rather than just put clever wording in a contract) with any agency contracts that come up

- to use some of the slack time for house repairs myself, thereby creating less work for local trades people

- to use some of the slack time to self-train in new skills, rather than paying for formal courses

- to take more, cheaper, holidays

The government will most definitely collect less in taxation from me as a result of IR35.

Of course another option for contractors is to pass on the cost of IR35 direct to the client, but again this simply increases UK costs and does nothing for competitiveness. In many cases, clients seem to prefer this option:

Interestingly, the client's official line is not to give rate increases to compensate for IR35, and I didn't ask for one. I said I wanted contract changes, and started looking for other contracts, but they preferred to increase the rate rather than "risk" changing contracts - bizarre.

Lastly, contractors are trying to limit the effects of the legislation and carry on, although for many this is clearly a waiting game:

I too will 'allow' the IR one hit only. If all efforts fail, and I am clobbered (which I fully expect, barring a successful JR) then I will take stock at that time. Going abroad is not an immediate option for me, but I wouldn't discount the possibility of doing so in future. However, I *would* seriously consider abandoning IT related work altogether, taking my many years of experience and expertise with me, to take up something far less stressful.

If I were to be hit with IR35 at some point in the future despite make the appropriate contract changes then I would pay up my tax + interest + penalties and promptly leave the country permanently making it my last contribution to the UK economy. Under IR35, I would be paying £50k+ in tax and NI and there is no way that is acceptable. My approach until things a clearer, i.e. until the PCG JR is won or New Labour get gubbed at the next General Election, will be to take things easy, take more holiday and "make hay while the sun still shines" (where have I heard that before). This government fails to understand that this punitive tax regime will be a major disincentive to people to be flexible and work hard meaning: lower productivity, lower mobility, lower flexibility but most of all, lower tax revenue for them.

Overall, IR35 has definitely been a catalyst for most contractors. Most are working more independently, or they are simply working less. For many the issues are not the marginal tax rates, but the restrictions that the legislation imposes on the way they do business:

I've done nothing to reduce my income - in fact just the opposite. If you really want to be not-caught by IR-35, then you will have to change the way you work. This means working more as a business rather than as an employee. Get a consultancy agreement in place. Get indemnified and harass your agents (if you use one) to get a proper Services based contract with clauses such as Substitution, Termination etc.

Luckier than that, I got an IR35-educated client to allow (pay) me to analyse the requirement, detail and propose a fixed price structure to the project and draw up the contract which gets the work done. Sure, there's greater risk - I've actually got to deliver - but it's what I started contracting for.

One contracting couple who are trying to build up a new venture which they intend to support through continued contracting pointed out a major problem restriction:

We could finish up having to pay our employees out of our after tax income!!!

At the other end of the scale, educating clients about the effects of IR35 is still clearly an issue. If more clients can be brought on side then this will change the dynamics of the market place.

The Client and Contractor should combine efforts to ensure they both safeguard their interests against IR35 and the government but, unfortunately the narrow minded employee who interviews you doesn't give a two penny worth.

The only conclusion is that the Inland Revenue's RIA got it badly wrong. Independent contractors have not rolled over and done nothing. Some have taken their skills abroad, but of those that stayed, three quarters are contributing less tax. Many of the contractors who are working to the status quo claim that IR35 will affect them once only, after which they will emigrate or radically change working practices. UK national income is obviously affected, and in the meantime, many who have the skills and flexibility to drive the UK forward as a competitive economy, have decided to reduce the work they do and the money they spend.