Companies could be forced to pay billions of pounds in benefits to IT contractors if the IR35 taxes rules aren't overturned.
Mr Justice Burton, who is hearing a judicial review brought by the Professional Contractors Group (PCG), said in court that a self-employed contractor who was treated as an employee for tax purposes by the Inland Revenue should also be entitled to employee benefits. According to Burton, it would be illogical for a consultant's income to be taxed at the level of an employee -- a higher rate than for the turnover of a company -- without the consultant receiving the benefits enjoyed by a full-time member of staff.
According to benefits specialists, if companies had to pay sick leave and holiday entitlement to self-employed IT workers, it could cost a total of £2bn each year. There are an estimated 90,000 self-employed high-tech contractors in the UK.
Under IR35 -- which came into force in April 2000 -- the Inland Revenue can decide to treat the turnover of an IT contractor or a small business as salary. The PCG claims that it is illegal under European Law, because it is effectively state aid for larger companies -- who would pay less tax than a small contractor firms caught by IR35.
According to the PCG, thousands of IT workers will be forced to leave the UK if IR35 goes ahead, damaging the UK's position in the global Internet economy. It brought the judicial review against the Inland Revenue in the hope of getting the tax rule overturned.
Closing the loopholes in IR35
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. For complete business coverage, see ZDNet UK's Enterprise Channel. Take me to ZDNet's Small Business Special. Have your say instantly, and see what others have said. Click on the TalkBack button and go to the ZDNet News forum. Let the editors know what you think in the Mailroom. And read other letters.