NB THIS IS NOW LARGELY OUT OF DATE
One thing is clear, these are times of change for the industry. By the time this issue is published, the planned meeting on 10th June will have taken place between the Professional Contractors' group and the Inland Revenue to discuss IR35.
Most Contractors will be aware by now of the government's proposals in IR35, tucked away at the end of the last budget. In IR35, against the background of political platitudes such as making sure that 'everyone pays their fair share', the government claimed there had been 'general concern about the hiring of individuals through their own service companies so that they can exploit the fiscal advantages offered by a corporate structure', and went on to declare its intention to bring legislation to ' tackle this sort of avoidance ' by April 2000.
After paying lip service to the need for encouraging business etc, the proposal went on to say 'the aim of the proposed changes is to ensure that people working in what is, in effect, disguised employment will, in practice, pay the same tax and national insurance as someone employed directly.' After a bald claim that 'ordinary workers' were 'unable to compete' as a result of these practices, the proposal went on to say 'the proposed changes are aimed only at engagements with essential characteristics of employment….There is no intention to redefine the existing boundary between employment and self-employment.' Things have since moved on.
Contractors will know that one of the major advantages of contracting is that it gives them empowerment over their lives, their careers, and the ability to learn how to run their own businesses. I lose count of the number of my clients who first came to me as Contractors, and, having gained confidence in the mechanics and responsibility of running a company, have gone on to use some of the surplus cash available as a result of their higher earning power to take entrepreneurial risks in establishing sidelines to their businesses and starting consultancies, agencies, and development of software products etc, which sidelines have then taken off in their own right.
The framework for the government's proposals has been laid down in a part of the Finance Bill, which allows for regulations to be made to alter the position of the existing boundary defining where a client is required to deduct NI contributions (employer's, and employee's) before making payment for services - even if the services have been provided by a limited company. (Up to now, of course, the interposition of a limited company controlled by the Contractor has meant that the burden of managing NI arrangements automatically passed to that company.). The powers allow for regulations to be made where 'an individual…personally performs, or is under an obligation personally to perform, services for…(a) client', under 'a contract between the client and a third party'. Whilst such regulations will have to be approved by parliament, as regulations they are less likely when published to be as exposed to debate or change as they would be if they were in an Act of Parliament itself - a not unusual procedure.
I saw that in the debate on this part of the Finance Bill, Mr Timms for the government said there were '50,000 service companies' supplying 'workers' - a figure coincidentally (?) very similar to the estimated current number of Contractors! It is clear it is you they are after! The illustration given in the debate was that a Contractor might have to deliver a specified result to a pre-determined deadline for a fixed price, and retain total control over what (s)he did and how (s)he did it, in order to be sure to remain outside scope of the new regulations.
It was also suggested that where the 'worker' was regarded for tax purposes as employed by a 'certified' agency, then the new arrangement would not apply. It appears that there will be a certification scheme, to be run by the revenue. Who will qualify for certification, and on what conditions, remains to be seen.
The Professional Contractors' Group is a non-profit organisation, set up by Contractors and others with an interest in the outcome of these proposals. They have made a submission to the revenue to try and mitigate the worst effects of the proposals, which you can see on their website at http://www.ir35update.co.uk - worth keeping an eye on for news as the situation continues to unfold.
My view at present is that I think the government, desperate for cash to try and raise extra taxation without being seen by the average voter to be doing so, sees here what has been described as a 'pot of gold', and already has raised its own expectations as to what it thinks it can get out of it, without realising the resulting likely losses to industry and the country. The politics, as someone said to me recently, 'seem to override all rational considerations'.
We will have to wait a while longer before seeing the final proposals - and it is only when they are available that we will be able to see where the final dividing line lies, and the extent to which our industry will be able to avoid their most serious effects. The best advice I can give Contractors meanwhile is to wait and see, and to be wary of entering any contractual commitment which lasts beyond the end of March 2000.
Meanwhile, there are other proposals afoot which are likely to upset agents - a consultation paper recently issued proposes changes to regulations under the Employment Agencies Act 1973, one of which changes may outlaw charging of fees to clients for releasing 'restrictions' in contracts …
11th June 1999
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