New IR35 benefits could burden employers

IT managers could become reluctant to use contractors after the judge in charge of the judicial review of the IR35 tax law said...

IT managers could become reluctant to use contractors after the judge in charge of the judicial review of the IR35 tax law said contract staff may be entitled to the same benefits as staff of client companies.

David Brown

Justice Burton said it was "entirely possible" that consultants subject to IR35 could be deemed an employee of a client company for the purposes of benefit entitlement. This would oblige client firms to make pensions, sickness payments and other benefits available to them.

Colin Beveridge, founder of IT interim managers association Premit, warned that giving consultants the same rights as employees would increase their cost to employers. This could reduce demand for their services.

"It would be a double edged sword for contractors - they would receive more benefits but would probably find less work," he said.

"As an employer of contractors, it would concern me because that would end the benefits of a 'pay-and-go' resource. It would probably strengthen the use of third party agencies so that we could sandbag ourselves away from the employee rights."

Philip Virgo, strategic advisor for the Institute for the Management of Information Systems, said it could lead to an increase in IT managers moving their operations abroad, using consultants based abroad or importing foreign consultants on a short-term basis.

Public sector employers will be hardest hit, as consultants would become a charge against their index-linked pension funds, said Virgo.

An estimated 45,000 IT consultants have been subject to IR35 since April. The rule increased the tax liabilities of consultants' personal services companies by taxing turnover as income. This increased the typical tax and national insurance liability from 21% to 35%.

The five-day hearing ended on Tuesday. A judgment is not expected for at least a week.

This was last published in March 2001

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