UK Freelancers Rejoice At IR35 Axe

by Robert Lee, Tax-News.com, London

25 May 2010

The Professional Contractors Group (PCG) has described the coalition government's proposal to scrap the unpopular IR35 regime as a "triumph of common sense over political dogma."

In the coalition government's full and final agreement, published last week, the government declares that it will: “Review IR35 as part of a wholesale review of all small business taxation, and seek to replace it with simpler measures that prevent tax avoidance but do not place undue administrative burdens or uncertainty on the self employed, or restrict labour market flexibility.”

The commitment appears as the fourth of 20 priorities for improving the UK’s ability to do business and is likely to be confirmed today (May 25) in the Queen's Speech, which sets out the government's legislative programme.

The Intermediaries Legislation (commonly referred to as IR35, after the Budget release signalling its introduction) was introduced on April 6, 2000, having been proposed in the 1999 Budget.

HM Revenue and Customs (HMRC) describes the purpose of the legislation as being "to eliminate the avoidance of tax and National Insurance Contributions (NICs) through the use of intermediaries, such as Personal Service Companies or partnerships, in circumstances where an individual worker would otherwise for tax purposes, be regarded as an employee of the client; and for NIC purposes, be regarded as employed in employed earner’s employment by the client".

Prior to the introduction of the legislation, an individual could avoid being taxed as an employee on payments for services and paying Class 1 NIC by providing those services through an intermediary. The worker could take the money out of the intermediary, normally a Personal Service Company, in the form of dividends instead of salary, resulting in the worker paying less in NICs than either a conventional employee or a self-employed person, and additionally, removing said income from the Pay As You Earn net.

John Brazier, Managing Director of PCG, which campaigns for fair taxation for freelance professionals and contractors, said of the decision to review this legislation that:  

“We are delighted that the new coalition government made this commitment to review IR35 as a priority only days after taking power."

“For the last 10 years PCG has campaigned for honesty and fairness when dealing with the UK’s 1.4 million contractors and freelance workers. With the end of the iniquitous IR35 we have the opportunity to achieve fairness."

“PCG has led the way in seeking the abolition of IR35 on behalf of our members. It has caused great heartache to many people. The cost in distress has been high, but the revenue for HMRC has been minimal."

According to the PCG, of the approximately 1,500 IR35 cases it was involved with, HMRC has proved additional tax was owed in around 10 cases.

“Despite repeated Freedom of Information Act requests and Parliamentary Questions the Revenue refused to indicate the cost of operating IR35," Brazier added. "As I said, PCG believes IR35 brought in a minuscule sum, if any, for the Revenue.”

Chris Bryce, Chairman of PCG added:

“Over the last few months the PCG team has had a series of meetings with the Conservative and the Liberal Democrat shadow front bench teams. We are delighted our message was heard and action taken. We will continue to work closely with the coalition government to ensure freelance workers are treated with fairness."

“Freelancing is a growing and valuable part of the UK economy. We are delighted that at last we have a government that appreciates this.”

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