Budget 2001: IR35 - See you in court

One option for the Chancellor in this week's budget, which would delight some in the IT industry, is to revoke IR35.

This measure, introduced by Brown in his 1999 Budget, affects contractors who pay themselves through their own companies, and will be applied from the tax year which ends on 5 April.

Previously, many freelancers took advantage of lower taxation on share dividends than on earned income, paying themselves largely through dividends.

From now on, this will only be possible if the Inland Revenue decides that a freelance job was carried out in a "self-employed" manner, with factors such as home-working, being paid by the job rather than the hour, and use of own equipment, helping to gain this status. Many IT contractors, who work in clients' offices for a set period of months, expect to lose about a quarter of their net income.

The Professional Contractors' Group, an 11,000-strong association set up to fight IR35, is taking the government to the High Court next week in an attempt to overthrow the tax-change, citing European legislation.

Brown could avoid this courtroom battle by backtracking on his 1999 announcement. However, there has been no sign from the government that it has any plans to abandon a tax change that affects a relatively small, highly-paid group of workers.

The contractors' best hopes may lie with the Conservatives, who recently pledged to drop IR35 if they win the election. Opinion polls suggest this is a fairly slim hope.