UK Tories Will Reform IR35

by Jason Gorringe, Tax-News.com, London

02 April 2010

As the Tory proposals - if elected - to scrap plans to increase National Insurance contributions previously announced by the Labour government, seem to be gathering support, it has also emerged that the UK opposition party is considering reversing government policy on IR35.

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 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 (PAYE) net.

The IR35 review would occur as part of a wider Tory tax simplification and reform initiative, according to Shadow Business Minister, Mark Frisk, who condemned the current Labour government for 'meddling' with the rules governing freelancers and the self-employed in the UK, and condemned the IR35 legislation in particular as "over-complex, uncertain and often unfair", suggesting that: "At a time when Britain should be open for business, Gordon Brown has made it harder to be self-employed."

Any moves - by either side - to remove or reduce the impact of the controversial legislation are likely to be welcomed by IT contractors in the UK, who were among the worst affected by its introduction a decade ago.

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