The Labour Government introduced IR35 (Intermediaries Legislation) in April 2000 in an attempt to remove the opportunity for workers to avoid employed levels of tax and national insurance by using an intermediary such as a Limited Company. The government argued that if the intermediary were removed the worker would be considered an employee of the client and therefore subject to employed levels of tax.
Prior to the introduction of IR35 any contractor could set them self up in a limited company and benefit from self employed levels of tax. Contractors would take a small salary from the company, claim business expenses and otherwise take the remainder of contract income in the form of dividends. As National Insurance contributions do not apply to dividends the worker would pay less tax than if a normal employee of the client.
The Government estimated that it was loosing a lot of money in tax revenue and decided to act with IR35.
Letter to the Professional Contractors Group
In a letter to the Professional Contractors Group, Mark Prisk MP (Shadow Minister for Business) said:
We appreciate the concerns that PCG and others have raised in respect of the administrative burden which the existing arrangements place upon contractors and the desire of your members to maintain flexibility, as opposed to being driven by tax considerations. We also note the arguments raised that the managed services companies’ legislation addresses many of the concerns about tax-driven behaviour. At this stage, we believe there remain some uncertainties about the tax implications of the abolition of IR35. Given the current state of the public finances, I am sure that you will understand we are taking a cautious approach towards making any commitments which may be perceived as increasing the deficit. However, we recognise and value the contribution of freelancers and the self employed and we are well aware of the way in which the current Government has treated them. We want to deal with this problem comprehensively, in a way which provides us all with a lasting solution, not a short term fix. So I am pleased to confirm that, if elected, a Conservative Government would undertake a fundamental review of small business taxation matters, including IR35. We would do this by mandating the independent Office of Tax Simplification to conduct this review, working closely with tax experts and those affected. In this way we believe we would be able to replace a complex, uncertain and unfair tax regime with one which is clearer, stable and which would give people the confidence to
start up and build their business.
Response from the Recruitment and Employment Confederation
Anne Fairweather, REC Head of Policy said in response to the announcement “The decision to take a comprehensive review of small business taxation, and in particular IR35, is a welcome move. Self employment, especially for those with specific skills, adds vital flexibility to our labour market. All political parties recognise that greater levels of self employment will be a route out of unemployment for many. In order to grow our economy out of recession we need the right tax environment for innovation and entrepreneurship.”
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