Issue 37; 10 January 2000

Campaign Review by PCG Chairman | What can you do to help | Role of Agencies and Clients

Campaign Review by PCG Chairman
On March 12th 1999, five days after the budget, I started a web site which led to the formation of the PCG and a full time (unpaid) campaigning job for me. Nine months on and at the start of the New Year I thought it useful to review the situation.

When we started PCG no-one gave us a chance. Against all the odds we have achieved significant movement from the original, unworkable proposals. At the same time we have created the fastest growing representative group ever and one that, for the first time, gives Contractors a real voice.

Members now know that they have 5000 fellow members who can support and back them up if they get grief from the Government, Agents, Accountant or Clients.

So nine months on is it enough? The answer is a resounding NO. As in March I hear people saying that "this Government has got a massive majority and will not change". "It is a waste of time trying", "You will need a miracle". It is not "Constructive"

Many of those who question our need or ability to influence events further are those whose businesses have not been put at risk by the proposals. Some of those who live off the back of contractors have even welcomed the proposals!

The Government has changed its position once and it can do it again. Nothing is yet cast in stone. Our members are convinced that if the Government truly understood the situation they would modify their proposals once again.

My view is we need to continue to explain ourselves, our position and our concerns to those politicians whose opinions count and who have not yet understood the full impact of what is proposed.

The PCG now has members in 9 out of 10 constituencies. They are eager to educate their MP. We have members going to MP's surgeries, visiting Ministers and contacting civil servants deep in the bowels of Whitehall. If it moves, has a pulse and has a passing interest in IR 35 it gets an email.

Our views are spelt out in more detail in my letter to Gordon Brown. This is a follow up to a meeting that a member had with the Chancellor of the Exchequer. (See link at end of this email)

What can you do to help?
I guess it is important to first understand why you need to help.

The objective of the Government is to remove the tax advantage of providing your services through a Ltd Company or partnership "in circumstances where an individual worker would otherwise be an employee of the client" (from IR website)

If you are a Ltd Company contractor working on a client's site ask yourself the following question. Do I consider myself an employee of my client? (If the answer is yes and you have been forced into working through a service company then we would like to hear from you.)

Now ask your client "Do you consider I am an employee? (If they answer yes ask them "can I have access to all the perks that you give your permanent staff?)

My guess is that in 99.9 per cent of cases the answers to both questions will be NO. If this is the case then clearly you are not employees of your client. Again, if I am wrong e-mail me, I want to know.

The Government does not consider a simple question of you and your client's motives to be the best way of checking this out. To prove that you are not an employee they wish you to consider if you pass the self employment tests. They say that everybody else can pass these so you should be able to. No problem. These are the tests that, for example, a carpenter will use - and who, incidentally, the Paymaster General considers to be a knowledge based worker.

But here is the problem. Check this out from the minutes of the recent Revenue meeting and as reported by Simon Sweetman of the Federation of Small Businesses (FSB.)

"Sarah Walker of the Revenue said that they had looked at the standard agency contracts and felt that these largely had the characteristics of employment. The agencies have said they have no intention of changing them."

In other words you may not consider your self to be an employee of the client, but the Contract between your Agent and the Client will say that you are and allow the Revenue to tax you as an employee. (Many of you will not even have sight of this contract)

To then check out how really unfair this is go and ask your client (or Agent) if it is possible for you to contract with them as a "self employed" (sole trader) knowledge based worker. As you have both agreed you are not employed it means you must be "self employed". The added advantage is that you will not have the hassle and expense of running a Ltd company.

I would be interested to receive emails on this. I expect that your clients will tell you that the tests for self employment are uncertain and they cannot take the risk of tax penalties of getting it wrong. As such they will only deal with incorporated companies. For the same reason your agent will have asked for a copy of your certificate of incorporation.

As I say to Gordon Brown in my letter "The problem is this: if self-employment status had provided certainty we would already have been using this method. The simple fact is that due to the way we work in the knowledge based sector, clients will not contract with us if we are 'self employed' rather than' incorporated businesses' because of the uncertainty arising from these outdated tests. (There are additional benefits of incorporation for a knowledge based business which include limited liability, retention of IPR and ability to build up equity value, but a fundamental reason for trading as a Ltd Company is because we have to, not because of the supposed tax advantages)"

Now consider the role of Agencies and Clients.
We have received reports of an Agent and their partner Accountant briefing clients that the impact on Contractors will be limited and therefore there will be no impact on Clients - business as usual. Our source said the client "breathed a huge sigh of relief when he heard this"

We disagree. Contractors who are forced into "circumstances where an individual worker would otherwise be an employee of the client" and taxed accordingly will want access to the same rights as employees. How about share options? Far fetched? In the USA contract workers seeking such employee benefits have just won a court case against Microsoft for this - even though they were working through an Agency. PCG will be making clear that our members who are forced by legislation into "disguised employment" will use legislation to gain these rights and have engaged legal opinion to support this.

Then we come to the question of what it will cost the Contractor. If you fail IR 35 your company will never make a profit, in fact the pathetic 5 per cent for expenses will probably mean that you will make losses and will never be able to retain earnings to provide for periods between Contracts. Unlike the real permanent employee you will have to pay for training, down time, secretarial support etc from taxed earnings. The result is likely to be reduction of up to 25 per cent in your post tax income. An analysis carried out by Accountant: Kevin Miller, shows that to make this up, rates to your Client will need to increase by 37 per cent. (see link at end of this email)

We suspect that many Contractors believe there will be a loophole. One Agent told our researcher " do not worry, our accountants are working on a loophole round the problem" Wrong. This is delegated legislation. This means that after April 5th the Revenue can take action without going back to Parliament. Offshore trusts, Composites, you name them, they will have limited shelf life. From leaks within the Revenue we hear that the first tweak is already in the pipeline. Those who fail IR 35 will be required to pay tax and NI monthly to prevent overseas based contractors from absconding without paying. After all you are "employees" now and employees pay monthly.

The clear objective of the Revenue is to force you to work as a "temp". They want you working on PAYE, which does not cost as much to collect as other forms of tax. The possible impact on the enterprise culture and the loss of opportunity for you to build a business is a foreign language to them. They work for a Paymaster General who considers that any one earning more than a nurse is a lifelong Tory voter and deserves all that is coming to them. She in turn works for a Chancellor who is probably the most powerful in history, working within a Government with a huge majority.

Good. Nothing worthwhile comes easy. Our challenge is to work within these constraints and effect change. The PCG has drawn a line in the sand on this issue. Our members are genuine businesses and should be taxed accordingly.

You can help by clearly stating to your Agent that if IR 35 comes in as presently proposed you will not renew your Contract past April 5th this year.

Help them explain this problem to your client by copying both your agent and your client the letter to Gordon Brown and the briefing document prepared by Kevin Miller.

Get them to inform their MP and Industry association. Ask them to join the PCG as an Associate member to ensure they keep fully briefed on this key issue.

Finally if you have not already joined the PCG, help us to help you by joining up.

Kind regards

Andy White
Chairman PCG
e: [email protected]
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