As the battle over IR35 entered its second day at the High Court on Wednesday, some of the IT contractors who are affected by the tax claimed it will cause long-term damage to Britain's high-tech sector unless it is overturned.
The Professional Contractors Group (PCG) believes that IR35 -- a tax which critics argue imposes an unfair burden on self-employed contractors -- is illegal, and is pushing this claim at a judicial review at the High Court this week. According to the PCG, hundreds of its members have already left the UK to work abroad since IR35 was introduced a year ago.
Several contractors are now warning that this trend will continue, and could have a severe negative impact on the future of UK business. "If IR35 had existed in California twenty-five years ago then Microsoft would never have happened, because they started off doing contract work," explained Andrew Banks of ADB Enterprises, which carries out commercial IT contracting. "If IR35 stays, then future Microsofts will not happen in the UK."
Ian Durrant, a director at the PCG, agreed, pointing out that big UK technology firms like Logica grew out of small numbers of IT contractors. "All the big software companies started with a few contractors. The UK's future is already being damaged by IR35 as IT workers move abroad." Some opponents of IR35 claim that thousands of IT workers could flee the UK.
Banks uses profits from ADB Enterprises to fund another high-tech company called Internet Intuition. He claims that this won't be possible under IR35 as almost all his turnover will be taxed because IR35 will treat him as a salaried employee not a company when he takes on a contract. "If IR35 stays in place then Internet Intuition will probably close, with the loss of four full-time jobs, or move overseas, because I will no longer be able to fund it from my contract work," Banks said.
Under IR35, the turnover of an individual or a small company that carries out IT contracting will be treated as salary for tax and National Insurance (NI) contributions by the Inland Revenue. When details were first made available, the government claimed it was cracking down on "Friday-to-Monday" workers -- where an employee quits his job one week, but returns to the same job the following week as a self-employed contractor in order to avoid paying tax.
By doing this, the company does not have to pay all benefits and entitlements, and can afford to pay the contractor more.
However, the Confederation of British Industry, the Institute of Directors and the Conservative Party, which has already vowed to repeal the law, all agree with the PCG that IR35 should be overturned. In a recent appearance on Sky News, Sir John Harvey-Jones -- one of the UK's most respected businessmen -- condemned the government for "bullying" the self-employed.
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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. 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.