The Pre-budget report is due out in a couple of weeks. Do professional contractors' groups have any sway when it comes to repealing IR35? It is unlikely, as Nichola Ross Martin, explains.

Anne Redstone (author of IR35, Personal Service Companies and a visiting professor of tax at Kings College, London) argued in last week’s 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.

When IR35 applies to an engagment, it is the worker (via his personal service company) who becomes responsible for PAYE & NICs instead of the person who is actually engaging him. However, the flaw in all the arguments put forward to repeal the law, 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?

Useful links:

Employers > essential know-how:
Employment status checklist

Directors > essential know-how:
IR35 for directors