Lib Dems tackle IR35 in tax review

IR35 is an excellent example of how government attempts to fix tax loopholes can have unintended consequences, say the Lib Dems in their consultation policy. Contractors have one month to tell the party how the fixes can be made less taxing

Contractors will have a chance during October to influence Liberal Democrat policy on the IR35 tax regulation, as the party launches a review of their taxation policies.

In a consultation paper, the party singled out IR35 as a case where attempts to tackle tax avoidance or evasion can have adverse consequences. "[Governments] try to close loopholes and this has unintended side effects — the IR35 controversy is an excellent example," states the paper. The public is invited to comment before 31 October, and the party plans to present the final policy at the Liberal Democrat 2006 conference.

On Thursday, the Professional Contractors Group (PCG) used its newsletter to announce that that it intends to respond in full to the consultation paper. PCG representatives, including deputy chairman Chris Woollacott, attended last week's Liberal Democrat conference to discuss how taxation policy impacts contractors.

"Although we still have a substantial job on our hands explaining the concerns of contractors to politicians, it was encouraging to see that senior representatives in the party seemed genuinely receptive to our input," said Woollacott in a statement. "They were surprised to learn that it typically takes a couple of years to settle one's employment status with the [Inland] Revenue and they seemed entirely unaware of the fact that one's IR35 and tax status can be determined by documents that the taxpayer is not a party to and probably hasn't even seen, despite operating in a self-assessment system."

The PCG also attended this week's Labour Party conference and plan to attend next week's Conservative Party conference.

IR35 came into force in April 2000 to tackle the problem of people that provided services through limited companies as a means of avoiding tax. IR35 allows the Inland Revenue to treat fees paid to a company as an individual's personal salary.

The PCG has argued that the legislation ignores the fact that contractors do not get any of the benefits normally associated with employment, such as sick pay, holiday pay, and company pensions, which contractors then have to pay for separately. The organisation has also asserted that IR35 unfairly penalises small IT services providers, because large organisations are not affected.