IR35 ruling means tax chaos

IR35 will stay but Inland Revenue 'completely discredited' by ruling, claims the group that brought the case over the government's controversial tax law

IT contractors face tax chaos after a judge issued new guidance to the Inland Revenue on the way it enforces IR35 tax rules.

Mr Justice Burton, the judge who presided over a judicial review of IR35, ruled on Monday morning that the Revenue had not been enforcing IR35 correctly, but did not overturn the rule. According to the Professional Contractors Group (PCG), which brought the case to the High Court, the decision is a partial victory.

"This ruling totally discredits the Revenue. It's not a win for us, but it is nearly a win," said Ian Durrant, a PCG director.

The PCG claimed in court that IR35 is illegal under European law because it acted as an unfair tax boost for big business, and because it restricted the free movement of workers within the countries of the European Union. It believes that IR35 will drive thousands of IT workers out of the UK. However, the government has insisted that the purpose of IR35 is to close a tax loophole.

Durrant told ZDNet News on Monday that the judge's ruling would mean chaos for self-employed workers. "This ruling means that every contractor has to reassess his or her situation. Any judgements brought by the Revenue will need to be reconsidered, as will any legal judgements," Durrant warned.

IR35 came into force in April 2000. It allows the Inland Revenue to treat a self-employed contracted worker as an employee for tax and National Insurance (NI) contributions, which the government claims will clamp down on the "Friday to Monday" syndrome. This is a tax scam in which someone resigns from a full-time job but carries on doing the same work as a contractor -- meaning they earn more as less tax has to be paid.

However, the PCG -- which was formed to fight IR35 -- claims that the tax will have a devastating effect on the UK's high-tech knowledge workers. According to its figures, hundreds of IT contractors have already fled the UK, and the PCG insists that thousands more would follow if IR35 was not overturned.

Some contractors believe that IR35 would wreck attempts to make Britain a major power in the high-tech world. They point out that almost all the major software companies started off as small companies carrying out contract work.

For complete business coverage, see ZDNet UK's Enterprise Channel.

The laws to discourage tax dodging, should not go so far that they make it better for people to leave the country and work offshore. Guy Kewney isn't sure whether abandoning IR35 altogether is the answer -- but it certainly needs some serious tidying up. Go to AnchorDesk UK for the news comment.

Take me to ZDNet's Small Business Special.

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