London, 10th November 2009
With the Pre-budget report due out on the 9th of December 2009, various special interest groups are lobbying for changes in taxation. Most vocal so far are those who represent professional contractors and seek to repeal the dreaded tax rules known as IR35. However, as tax expert Nichola Ross Martin explains, the government is so dependent on contractors that any request for change is unlikely to be heeded now or at any time in the foreseeable future.
Anne Redstone (author of IR35, Personal Service Companies and a visiting professor of tax at Kings College, London) argued in Taxation magazine that IR35 “is a high-cost, high-stress and a low revenue part of the tax system”. She argues that it is unfair to make small business subject to such complex rules; they serve only to stifle entrepreneurs.
Her call has been matched by the Chairman of the Professional Contractors’ Group, Chris Bryce, who has written directly to the Chancellor. He sets out a number of issues affecting freelancers and including an urgent need to repeal IR35 and to drop proposals for "Income Shifting" legislation. Whilst also requesting re-examination of sections 44-47 of the Income Tax (Earnings and Pensions) Act 2003, which effectively force a contractor to incorporate.
The problem with all these arguments is that IR35 suits the government quite well, especially in a time when the Treasury is demanding efficiency savings from other governmental departments. The Ministry of Defence is heavily reliant on contractors, many of whom as ex-forces and now contract via umbrella companies to service, maintain, cook and clean our military machinery and bases. Likewise, the NHS uses a small army of contractors on similar lines. Lord Carter’s transformation programme has meant that departments such as HM Revenue & Customs are completely reliant on IT workers, the majority of whom are contracting via their own service companies and umbrella companies. State funding of the 2012 Olympics also demands cheap labour whenever possible, and then of course, there are the banks. Banks are heavy users of contracted labour, and some which are state owned too these days. So, why would the government wish to abolish IR35 and repeal tax-employment law? There is no logical benefit: it stands only to increase its own costs, which are of course, our costs by 12.8%, and no one would want that, would they?
Nichola Ross Martin, is Tax Director with www.rossmartin.co.uk and Head of Ross Martin Tax Consultancy's Virtual Tax Partner services.
A Chartered Accountant with over 20 years experience in advising owner-managed business and assisting other professional firms. She trained with Baker Tilly before setting up her an accounting and audit practice. In 2000 she moved into tax acting as tax director for a firm accountants in Kent before setting up her own Virtual Tax Partner consultancy service. She is the creator the Practical Tax Database, an online service that provides tax planning and know-how to accountants and tax partners. Nichola advises clients and accountancy firms nationwide.
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