IR35 abolition welcomed by contractors group

PCG also praises government plans to set up an Office of Tax Simplification

The government’s decision to abolish the IR35 tax legislation has been welcomed by the Professional Contractors’ Group (PCG)

The government’s decision to abolish the IR35 tax legislation has been welcomed by the Professional Contractors Group (PCG), which was set up in 1999 to oppose the legislation.

IR35 came into force in 2000 and was designed to close a tax loophole that allowed IT contractors to pay reduced tax and national insurance by offering their services through a limited company, even though they were effectively working full-time for a single employer.

The legislation aimed to stop contractors who were working long-term for a single employer from setting up as limited companies.

John Brazier, managing director of PCG, described IR35 as a “dreadful piece of legislation” and said that it had “caught everybody in the same net”, adding: “People who have been working legitimately for many years as experienced contractors in a number of different fields suddenly had to prove their employment status, or lack of it, to the Revenue, who were treating everybody with a freelance or contractor label as a tax evader.”

The legislation had not even proven effective from HMRC’s point of view, added Brazier, who said that HMRC’s own data showed that IR35 brings in only £1.5m a year in revenue.

“The last government didn’t really understand what small businesses of this kind were about,” he said.

“There are some companies that engage a contractor for a short term contract and then re-engage them on another short-term contract.

"There’s nothing wrong with that, but HMRC have interpreted that to mean that because you’ve had a number of consecutive contracts, you’re just a regular employee.

"But you’re either a limited company on your own and taking risks on your account, or you want to be a full-time employee. The government should recognise your status.”

It is not yet clear what will replace IR35, but freelance IT workers will welcome the coalition government’s announcement that it plans to set up an Off ice of Tax Simplification to introduce more straightforward, less bureaucratic tax legislation.

In its Programme for Government document, the government said that it would “seek to replace it [IR35] 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.”