IR35 - Jobs At Risk

HEADINGS:
Blair exposed on business taxes
General economic background
For Internet articles

This fact sheet explores the UK Government-Inland Revenue IR35 proposals. They will affect over 300,000 people, and immediately put an estimated 66,000 jobs at risk. It explores some of the likely motives behind them.


WHAT IS 'IR35'?
In the 1999 budget, Chancellor Gordon Brown announced he was taking action to stop staff leaving a company and returning as a contractor, avoiding National Insurance payments. However, in a draconian move, the Inland Revenue's (IR) proposals, IR35 went well in excess of this; they mean:

  • regarding contractors who provide services to a client as directly employed, requiring PAYE tax and NI to be deducted at source. There is a potential get-out for contractors who work on a project or fixed-price basis, but they must first gain IR agreement that they are not "subject to client supervision and direction".

  • restricting currently-deductible business expenses such as equipment and training. The loss of these essentials would effectively push contractors back into the 'permanent' job market in an age where more freelance employment is the trend and has led to, say, 20% of the computer industry working on contract. Freelancing is commonplace in the engineering, medical, legal and film production professions.

    Motives such as being able to move around to gain experience, choose one's own work patterns and control one's own career development are more common than 'tax avoidance'. (There is nothing illegal about 'avoidance' - it's 'evasion' that is illegal!! Where contractors pay themselves out of profits (dividends), the sums are often spent on keeping themselves and their families from being dependent on state assistance - something the Government is supposed to support.

  • in many cases, cutting the 'gains' the Chancellor said he'd given small businesses in the Budget, such as a company tax cut of 1% and the use of some equipment as a business expense.

  • some 300,000 workers are believed to be affected, Also people in professions that support them, such as employment agencies, financial advisers, accountants. Some 66,000 jobs are reported to be immediately at risk.
In return, a British Computer Society spokesman notes, the unwanted 'benefits' of European social legislation would be forced on contractors who were able to get 'permanent' jobs, albeit for a few months.

"Client companies" who currently benefit from contractors' services stand to lose. In areas of skill shortage, contractors might be tempted to drop out or work abroad - thus making skills shortages worse. Some who work through agencies might have to raise their charges to offset the losses. In any case, much work would be created by the upheaval of having to put extra staff directly on the payroll.

Not surprisingly the proposals are opposed by
  • Confederation of British Industry
  • Institute of Directors
  • Federation of Small Businesses
  • Charted Institute of Taxation
  • Institute of Chartered Accountants (England & Wales)
  • The Law Society
  • British Computer Society (ICC Group)
  • Professional Contractors Group
  • Association of Temporary & Interim Executive Services
They fly in the face of PM Tony Blair's glowing claim that the Government "strongly supports small business, especially in the high-tech sector" and favours "lower taxes still for small business" (Fed of Small Businesses' ' First Voice' magazine, June/July 1999).

There must be something very important behind the proposals for the Prime Minister to go against his own word.


ECONOMIC BACKGROUND TO THE PROPOSALS

Computer professional Michael Wigley has noted that the proposals will bring the UK into line with German employment practice.

In 1997, keen to show his pro-European credentials, the new Chancellor Gordon Brown supported EU proposals to eliminate "harmful tax competition'... proposed by... Germany. In March 1998, a specialist journal, Taxation Practitioner, revealed the German Finance Minister had for some time been complaining at how low tax rates in Britain were, depriving his government of billions in lost tax.

On 17 November 1998, a formal agreement - The New European Way - was reached with the EU's predominantly left-wing governments on "tax co-ordination". Former Government adviser Patrick Minford condemned the moves "There is no way that their taxes are going to come down to meet ours" (Times, 19.11.98)

European Tax Commissioner Mario Monti had already made it clear that "reform" of the tax system was targeted where national tax levels were less than the EU average. (Read "Britain". See Daily Telegraph, 22.10.97). The EU/EEC has been looking at "crucial" tax harmonisation since at least 1975, following the Ruding Report, 1992, the EcoSoc Committee spoke in 1996 of the logic of having "tax conditions equivalent to a single state"

By coincidence, New Labour also forced through the Amsterdam Treaty on European Union (1997, Article 58.1.b) that insists upon measures to end "tax avoidance" (undefined).

On 18 March 1999, i.e. around the time of the Budget, three EU committees met - UNICE, the European employers' federation; ETUC, representing trades unions, and CEEP, representing the public sector. They agreed a document "Framework Agreement on Fixed Term Work", which talks of work to Social Chapter "policy requirements" and "collective agreements" - even if in the case of the latter, none exist within the company or industry directly concerned.

In short, the livelihoods of hundreds of thousands of fixed term contractors and the trades that depend on them are to be manipulated for political reasons

It notes that the European Commission intends to propose a "legally-binding Community measure". Britain will have no veto, therefore the only way to preserve the interests of many highly-skilled workers will be to "name and shame" the Government and its accomplices into dropping the moves.


OTHER INTERNET ARTICLES

NB None of the organisations concerned are connected with New Alliance

Readable analysis from British Computer Society's ICC (contractors') group

An alternative: Joint submission to the Inland Revenue from 4 professional groups

Rupert Bayfield gives an industry view

IR35 Protest Site: one contractor's perspective

ETUC-UNICE-CEEP Framework Agreement on Fixed Term Work

Inland Revenue guidelines on applying IR35
NB Previous material on Tax Avoidance/GAAR no longer listed



FOOTNOTE

The British Chambers of Commerce lists the Government's own calculations that the measures had cost British business 523m (as at May 2002). The recurring financial cost is given as 300m p.a.

The Government does not quantify the considerable stress experienced by Inland Revenue staff in having to work with inconsistent and unwieldy guidelines. Nor does it predict the potential damage due to evolving EU proposals for 'equality' between temporary and permanent staff - these unwanted 'benefits' will create further admin overheads and have to be paid for out of money that would otherwise be paid to temporary staff.

With acknowledgements to the research of Dr. Peter Gardner; Christopher Arkell, Freedom Today, June 1999.

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This page compiled: 15 December 1999, updated: 25 September 2002