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What is the IR35?

This campaign is the one that is of most importance to members at the present time. It is the campaign that founded the PCG and will remain the centre of our attention for the foreseeable future.

According to the Inland Revenue website:-

‘The purpose of the proposed new rules is to remove opportunities for the avoidance of tax and Class 1 National Insurance Contributions (NICs) by the use of intermediaries, such as service companies or partnerships, in circumstances where an individual worker would otherwise be an employee of the client or the income would be income from an office held by the worker.’

In reality, the proposals will catch any limited company worker (or similar intermediary) who is working for a client but who does not meet the outdated definition of self-employment.

As a result of extensive lobbying by the PCG and other groups the original proposals were modified and published by the IR on the 23rd September.

The PCG see three main problems with the legislation.

In the first instance, independent contractors must determine whether they and their companies are subject to IR35 or not. To clear the IR35 barrier both the personal circumstances and the current contract must reflect self-employment. The uncertainty created by the implementation of the legislation is a significant burden on those businesses that may or may not fail the tests. This goes against the Government’s wishes to create a favourable regulatory environment for business in the UK.

Secondly the IR35 legislation will prevent the Limited company from retaining profits in the business, which can then be used at a later date to grow the business. This goes against the Government’s wishes to create a more entrepreneurial business environment.

Finally, the implications for most independent contractors caught by IR35 are financial. Tax and NI costs are likely to double, meaning that post tax income will fall by about 20% to 25%. Contractors will need to increase rate by over 30% to compensate. This goes against the Government’s wishes to create a stable, inflation free economy.

Consultation
The Government has repeatedly claimed that these rules were the subject of an extensive consultation exercise. They cite the thousand of pieces of mail as evidence of this consultation.

However the PCG strongly believe that this consultation was a sham. The PCG made a submission to the process but the Government simply did not take heed of our concerns. PCG members wrote to their MPs complaining that Independent Contractors were not being given an adequate hearing and as a result the PCG were invited to a meeting with the Revenue in September 1999. Far from being consulted at this meeting the PCG were simply told about changes to the new rules.

The original proposals were a disaster for the business sector, for both Independent contractors and their larger competitors. The revisions made in September lessened the effect on “Big Business” and put the onus solely on the small, Independent Contractors. In addition, the changes made throw doubt on the Governments originally stated aims. It is now possible for businesses to continue evading their employment responsibilities, by taking on staff but disguising their employment through an intermediary. In fact the new legislation unwittingly encourages this practice. However, the rules also hit the self-employed Independent Contractor and fledgling consultancy companies.

PCG activities, Past, Present and Future.
Despite the lack of consultation, the PCG’s actions have largely been responsible for IR 35 becoming a major issue for the Government and its political managers. Although the size of the Government’s majority has made it difficult to affect changes to the proposals, there have been significant changes as a result of the debate started by PCG. For example, recognition that an investment in training is, for a knowledge based contractor, a valid investment and as much of a financial risk, as a major investment in plant is for a traditional self employed worker.

PCG has lobbied hard on behalf of the contractor members – both with Government ministers, with Opposition leaders and in the Lords. In addition, PCG has raised the debate through a high profile press campaign. We have members in over 90% of constituencies and have set-up lobbying procedures to help members contact their MPs. The Times described our Internet based campaign as “unprecedented”.

More importantly, PCG members have set up a legal challenge fund and we are using a top legal team to look at having the legislation struck down.

More than one year on since the IR35 announcement we know that many MPs still do not understand the implications of the proposals. PCG members should use the IR35 lobbying information and Forum board to find the latest information on how they can best add their voice to the campaign. The PCG will continue with its endeavours to educate members of parliament.

The Inland Revenue site with IR35 details
Original IR35 Press release
PCG IR35 Resources
PCG Draft Contracts
IR35 in Parliament