IR35 Starts To Drive British Consultants Abroad

Jason Gorringe, Tax-News.com, London

23 January 2001

Ever since last 6th April, the start of the new tax year in the UK, the consequences of the Inland Revenue's contentious IR35 legislation attacking self-employment and personal service companies have been revealing themselves, much as predicted by the numerous professional bodies, associations and practices who tried so hard to prevent the legislation from reaching the statute book in the first place.

Although much evidence has been anecdotal, there can't be any question that a large slice of the UK's professional services sector has re-based itself more or less permanently abroad, particularly in the Netherlands, Ireland and the US, as well as in the UK's offshore dependencies Jersey, Guernsey and the Isle of Man. And this at a time when the country is taking panic measures to increase the supply of qualified skilled workers to the crucial IT sector by opening the floodgates to immigration from India, Africa and Asia. Other European states, equally strapped for skilled workers, who are benefiting from the Treasury's largesse must think we are mad.

Last week the UK periodical The Spectator carried an excellent description of one man's battle against IR35. Entitled 'Why I No Longer Love Tony', the ex-Labour supporter explains how the disastrous and bigoted IR35 legislation was the last straw that turned him away from his long-term attachment to the party.

Read the article at

Why I no longer love Tony
Andrew Duncan voted Labour in 1997. But they let him down with a new tax scheme that can take up to 25 per cent from your net income. Now he hopes that the Tories will abolish it

I used to be a Blairite believer. There, I’ve said it. I travelled with Blair and his guilt-ridden, middle-class gang and believed that the rights of the individual should be compromised to serve the needs of the group. I still possess a northern accent, and I grew up on council estates, went to a comprehensive and took up my full quota of free school meals. It is only by the grace of God that I am not, in fact, Alan Milburn.

Like the Blairites, I once flirted with leftie splinter groups, and like them I gradually watered down my socialism. I even took Peter Mandelson’s advice and formed an information technology start-up, discovering, in my process of yuppification, wine bars, skiing and the city of Florence. By 1 May 1997 I was such a red-rose zealot that when Tony and Cherie arrived in Downing Street and accepted the ovation of those Union Jack-waving ‘kids’, I was there, too. As a graduate of the Rossington colliery picket line, the Militant Tendency underground and a collector of the fine works of Steve Bell, I truly thought this was the day we would rinse the world clean.

I admit that my doubts about taxation had already begun before the election. As a new company director, I started writing out cheques directly to the Inland Revenue. This was a shock. As an employee, I’d never noticed anything on the salary payslip except the net figure. For the first time I discovered the Employer’s National Insurance (NI), a tax unnoticed by most permanently employed people because 12 per cent (or so) of their gross salary is removed before they even get to see their gross salary. (Associating the phrases ‘National Health Service’ and ‘National Insurance’ is a trick, whereby the religious feelings evoked by one blind us to the gross corruption of the other. NI does not fund the health service. It just goes into Gordon’s pot.)

I remained, nonetheless, a committed Labourite. Blair apparently had no plans for new taxes and was keen to reward our ‘knowledge-based’ industries. I had nothing to fear from persuading my friends to vote for him. He wasn’t going to throw money at problems. He was going to reorganise transport, so that I could ride my bike to the station where I’d catch a shiny new train with special bike racks, which would always depart at the advertised time.

He was going to allow Frank Field to abolish the dependency culture. None of this would need more money, just joined-up government. Finally, Tony wasn’t going to bleat impotently about the urchins of the council estates I grew up with. He was going to sort the yobs out and then clean out all of that Tory sleaze.

Since when you could say that the scales have fallen. When I look at Labour now I see John Prescott’s M4 Kremlin lane and the railway paralysis; Frank Field sacked and Darling tinkering with the welfare monolith; Alan Milburn spraying treble-counted cash around; Jack Straw presiding over a growing culture of drunkenness, violence and a shrinking population of brow-beaten policemen. I won’t even mention the Dome, or Robin Cook. You may have noticed I’ve flipped all the way, like an ex-smoker, from one passion to the opposite, and the reason is a tax called IR35.

This was a scheme originally hatched by the Inland Revenue in the 1980s. It has to do with the taxman’s hatred of anyone who manages to escape from PAYE, the narcotic process whereby your tax is taken from your salary without any voluntary action on your part. The IR tried to persuade Conservative ministers that if you were a self-employed person, but you were (in the Revenue’s arbitrary opinion) under the ‘supervision and control’ of your clients, then you were, in effect, a ‘disguised’ employee. This meant that you had to take your entire income as salary, fully taxed and subject to NI.

You could no longer decide that some of your revenue could go on — say — training, computer equipment, or some other form of investment. To make matters worse, you had none of the perks of true employment, like holidays or pension rights; and when the contract was over, you weren’t entitled to the dole, since, in the Revenue’s magnificent doublethink, you were an employee of your client for the purposes of taxation, but employed by your own contracting firm when it came to benefits. In a nutshell, it meant that you lost up to 25 per cent of your net income in tax and NI for nothing in return.

This crackpot scheme was thrown out until, eventually, the IR stumbled over a government stupid enough to adopt it. Gordon Brown wanted to lever in a starting corporation tax rate of 10 per cent. Which was a nice idea, but which promised to cost a bit. How to grab a headline without stumping up? The IR had the answer. They dusted off their wheeze, which they had abortively applied to the building trade, and persuaded Gordon to think it was his. With the help of Dawn Primarolo (the Treasury minister who once refused to pay the poll tax), they slipped it into the March 1999 supplementary budget papers, and so was born IR35, named in honour of the serial number on the Treasury press release.

The IR assumed that every contractor was ‘employed’ by their clients unless he or she could prove otherwise. This means that if you’re a carpenter possessing your own chisels, you are self-employed no matter how much you are directed by your client, but if you’re a Unix System Administrator who is consulted on your experience and knowledge rather than your screwdriver skills, you’re ‘employed’, and you’re done.

It was the sheer unfairness of IR35 that started to eat away at me. So much depends on whether you can get the word ‘substitution’ into your contract or not. If your work can be performed by a ‘substitute’ from your contracting firm, then you have a better chance of convincing the bottom inspectors of the IR that you are self-employed, not a ‘disguised’ employee. The tax would also appear to be targeted specifically at making small operations uncompetitive and leaving bigger corporations alone. This is simply outrageous. Who are the IR to decide what is a ‘legitimate’ business? Has nobody explained to them that most of the big new IT companies in Europe are American because you can start a small business over there in a garage and make it a big one without being smashed into the ground by tax, rubber-gloved regulation and the fear of jail? Can’t this nasty little government come up with a simple set of Lawsonian rules everyone can understand and then let them get on with it? Most of those pompous double-firsts in the Treasury couldn’t run a paperclip stall without a subsidy. How dare they tell us how to run our own businesses!

One even suspects, in one’s fury, that the Revenue want to close down all of our small companies, forcing us into PAYE employment with American multinationals where we can be more easily taxed. To hell with the enterprise culture, as long as we can all be filed neatly. Indeed, in the IR’s own risk assessment it is stated that they expect at least 60,000 companies to close down solely as a result of IR35. Is this the government that wanted to promote small businesses in the IT sector?

Once the news of IR35 seeped into the disbelieving IT world, there was a storm of outrage, which has grown by the month and gone far beyond anything the IR imagined. Many contractors have fled into permanent employment, while most of the rest caved in, temporarily, knuckling under in the hope that the IR will lose in the courts. Gordon Brown dartboards and punch-bags are particularly popular. Indeed, as a member of a mining family, I haven’t seen such loathing of a single individual since Margaret Thatcher in the early 1980s. At least some miners could appreciate what Thatcher was doing. In IT contracting circles Brown is universally despised.

The IR35-compliant group have also responded to this larceny by pushing up their charges by as much as 30 per cent, which has grossly inflated IT costs and increased the risk of larger business failure, which could in turn increase the chances of recession. But there are some IR35-freedom fighters, who would rather go to jail than get down on their knees before Gordon, and some indeed may yet do so. Those opting for IR35-resistance are risking years of victimisation by the Inland Revenue, especially when they start their spot checks at the end of this financial year (if I should be chosen ‘at random’ for one of these Lubyanka trawlings, I’ll keep you posted, if I don’t get a legal bullet in my neck first).

Why pick on us? We have international IT skills, are often single, speak English as a first language and are not restricted to work in one country. Wherever we lay our anoraks is our home, and there are hundreds of thousands of unfilled IT positions in the USA. Try booking a seat on the Virgin flight out of San Francisco on a Friday evening. You’ll find it’s already full of British contractors commuting monthly in business class, such are the financial benefits of not being mugged every quarter by Dawn Primarolo. Ireland is the same, with hundreds now commuting to Cork and Dublin every weekend. As the East Germans discovered before the Wall, there are still escape routes open to the West.

So great is the exodus from the UK, in fact, that the Home Office is trying to relax immigration regulations to strip the developing world of its IT talent. This doesn’t seem very socialist to me, exiling your own people and then bleeding India of her wealth creators. Ironically the largest ‘disguised employer’ of IT contractors in this country is the government itself, with services supplied to the Inland Revenue and the Ministry of Defence by American companies such as EDS and CSC. Perhaps the National Audit Office should bring Dawn Primarolo to book for wantonly increasing government costs.

We have not given up. We have formed a 100,000-strong Professional Contractors Group (patron John Harvey-Jones), and our lawyers say we may be able to strike down this inept tax on the grounds that it contravenes European law. On 10 October last year the PCG won the right from the High Court to have IR35 judicially reviewed, despite frantic opposition from the Revenue’s lawyers. Our main point is that IR35 is an illegal provision of state aid to larger competitors, because they are exempted from it. The full IR35 case will be heard shortly.

I want to end with two words of warning: one to the rest of you, journalists and lobbyists and ‘consultants’ and anyone else on a freelance income, anyone not yet caught by PAYE. If you have formed your own company, selling your knowledge and your contacts, they will want to get you. They may have picked on us because they thought we were a soft touch. But if we lose our battle against IR35, they will come for you next. Finally, a word to Michael Portillo. Instead of saying he would abolish IR35 in his first budget, the shadow chancellor recently toyed with only ‘reforming’ it. Michael, Gordon Brown has created 100,000 bitter and twisted enemies out of a powerful and high tax-paying group of previously politically ambivalent people, most of whom are now grafting night and day to make IR35 Gordon Brown’s personal Waterloo. Don’t let yourself fall victim to his curse. Many of us have turned to the Conservative party in our hour of need and we do not expect you to let us down. If you do, it will be ugly. Alternatively, if you do abolish IR35, you could gain 100,000 influential lifelong friends overnight. As Cilla would say, the choice is yours. And if the Tories lose again, and we have another four years of Gordon’s rapacity, will the last to leave please shut down the website.

Andrew Duncan is a Java web development consultant, Oracle DBA and Perl trainer, co-author of a forthcoming book, Oracle and Open Source, for O’Reilly Press. The fee for this article is being donated to the PCG legal fund challenging IR35 in judicial review.

.

Recommended

Write a comment