Time to pay

Contractors are now subject to the IR35 tax laws, and price rises and skills shortages loom, Bill Goodwin report

Contractors are now subject to the IR35 tax laws, and price rises and skills shortages loom, Bill Goodwin report

IT contractors have finally lost their patience. For many of them, the budget in March was the last straw. After months of protest, the chancellor did absolutely nothing to soften the blow of new IR35 tax regulations that are threatening to drive some of Britain's most skilled freelance IT workers overseas.

The Government could not have picked a worse time to clamp down on freelance IT staff. With every big business and government organisation rushing to develop electronic commerce, demand for contractors, particularly with e-commerce skills, is about to sky rocket. If threats of a mass exodus of contractors to more favourable working conditions overseas have any truth in them at all, employers may have a lot to worry about.

IR35 was introduced by the Inland Revenue last year as a way of closing a loophole that allows unscrupulous contractors to avoid tax. But the ramifications are far wider. Under the new rules most contractors will be treated as employees for tax purposes. In practice, this means that most can look forward to cuts in income of 10% to 15% if they remain in the UK.

More worrying for contractors, they will no longer be able to offset more than a few token expenses against tax. Many fear that this will push the cost of training beyond their reach, making it impossible for them to keep up to date with the latest IT skills. Those with offices, secretaries or other overheads, will also find themselves having to shell out far more to the Inland Revenue.

Contractors are beginning to vote with their feet. The most recent survey by recruitment agency DP Connect shows that almost half of the 200 contractors questioned are considering looking for work overseas to avoid IR35. Some, such as IT consultant Kevin Peacock, have already decided to throw in the towel.

Too risky

Peacock is running his own thriving business in the UK, advising clients on Lotus Works and Domino. The business is expanding, and, until recently, he had plans to take on and train a graduate to help him in his work. That was before IR35, which, he says, makes continuing with his business just too risky.

"I don't see how I can operate with any certainty. I don't know how much to bid for a job in advance because the Revenue will only assess a signed contract [to see whether IR35 applies]. Even if the Revenue has assessed a contract as being free of IR35 they can come back any time within seven years and claim that they made a wrong assessment," he explains.

What angers Peacock the most is that IR35 makes it impossible for him to expand his business. If he hires another member of staff he says there will be no option but to pay tax twice, once on his salary, and once again when he uses his salary to pay the employee's wages.

"I think it is ridiculous. I could buy a van and deliver PCs and escape IR35, but if I use PCs for a living then I am caught. It speaks volumes for the sort of industry the Government wants to encourage."

IT consultant Stuart Ranson is another contractor with strong feelings about IR35. He left his girlfriend behind and headed for Holland in January to avoid its clutches.

"Basically, it was going to take at least 12% of my income. I would no longer be able to keep money in my company to see me through lean times and I would not be allowed to keep any money for training," he explains. "The whole thing goes against the way governments should operate."

In Holland, unlike the UK, the Government has introduced lenient tax rules for IT workers. It permits them to take the first 35% of their earnings home tax-free. Switzerland, with plenty of cheap flights to and from the UK, is also seen as a potential new location for IR35 escapees.

So far, there are no signs that these defections are turning into a mass exodus. "As far as contractors are concerned it is still early days. The reality is that many contractors have partners and children at schools, so they can't up-sticks and go, but it shows the strength of feeling," says Jan Stevens of DP Connect.

Many contractors are biding their time, waiting to see how the Inland Revenue will react to a model contract developed by the Professional Contractors Group that could help them avoid IR35. But David Ramsden, the PCG's director, warns that contractors will need to treat the contract with caution - it may not be the solution to everyone's problems.

IR35-proof contract

"We have not said sign this and you will have a watertight IR35-proof contract. Unless the contract reflects the reality of your employment situation it is no good . The Revenue will see right through it," Ramsden says.

Others are pinning their hopes on plans by the PCG to force a judicial review. The group, which saw its numbers swell by 2,000 to 8,000 within a fortnight of the budget, intends to take the Government to court over IR35. Its lawyers believe the new rules are in fundamental breach of European competition law.

The crunch will come later in the year. If IR35 has anything like the impact that contractors claim, employers will be struggling to find the people they need to develop their e-commerce systems. Meanwhile, there will be no shortage in demand for IT staff in continental Europe, where firms are desperate for IT staff to convert their systems to the euro.

This was last published in May 2000

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