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End of IR35 tax rules welcomed by IT contractors

The government has pledged to abolish the unpopular tax legislation, the focus of court battles between IT contractors and HMRC

IT contractor groups have welcomed the coalition government's pledge to abolish IR35, the unpopular tax guidelines that were introduced to try to stop tax avoidance.

The Professional Contractors' Group (PCG), one of the largest orgranisations representing British IT contractors, said it was "delighted" to hear of the proposed abolition of IR35.

"Few will lament the passing of IR35 when it is finally confined to history. It was badly drafted and created massive and unjustifiable problems for contractors," a spokesperson for the PCG told ZDNet UK on Monday.

IR35, which came into force in 2000, was introduced to eliminate a loophole that allowed contractors to effectively work as full-time employees for a business but to avoid paying tax and National Insurance contributions as an employee. Individuals could provide their services through an intermediary company and, by taking payment by dividends from that company rather than salary, end up paying less to the tax authorities. The legislation caught up many IT and tax advice contractors.

However, it frustrated many contractors who complained that it was bureaucratic and time-consuming, and that the rules on who it applied to were unclear. Many have taken HMRC to court to dispute their tax bills under the legislation.

The coalition government outlined its plans to abolish IR35 in its Programme for Government, published on Thursday. "We will review IR35, as part of a wholesale review of all small business taxation, and seek to replace it with simpler measures that prevent tax avoidance but do not place undue administrative burdens or uncertainty on the self-employed, or restrict labour market flexibility," the coalition said in the programme document.

Few will lament the passing of IR35 when it is finally confined to history. It was badly drafted and created massive and unjustifiable problems for contractors.

– Professional Contractors' Group spokesperson

The PCG, which was established with the aim of fighting IR35, said it will continue to lobby the government on issues facing IT contractors.

"We would say to all concerned in drafting new legislation: don't rush it. Just get it right," said the spokesperson. "PCG wants to see IR35 replaced by a fairer and better thought-out piece of legislation that is transparent to all parties and is also efficient to all parties."

The IR35 rules must be replaced by more concrete legislation with specific tests that can be used by contractors to calculate their tax bill with certainty, according to Derek Kelly, managing director of ClearSky Accounting, a company that provides tax services for IT contractors.

"We believe that the priority for any review of IR35 needs to be about certainty," he told ZDNet UK on Monday. "As the legislation stands, IR35 is subjective, and as a result, different views by different parties can be reached using the same set of facts. What [IT contractors] ask for... is certainty about if and when they face a tax bill and for how much."

However, observers warned that the phasing out of IR35 would take some time. Qdos Consulting, a tax advisory firm for IT contractors, said no changes were likely before the emergency budget in June.

"It is hoped that the government will take its time to produce measures that are fair, clear, transparent and workable. If that is to be the case, it may be that the criteria for a contractor being able to trade through their own personal service company could be narrowed. It is probably more plausible that any IR35 replacement will be introduced in the next fiscal year," the company wrote in a blog post.

"So on the face of it [is] some good news for contractors and a step in the right direction, but the devil may well lie in the detail. Therefore, temper your optimism with a degree of caution at this stage," it warned.