The Inland Revenue appeared to accept some of the arguments made by contractors against the IR35 tax reforms, while their cause gained support in the House of Lords.
In meetings held yesterday and this morning at the tax collection agency's Somerset House headquarters, representatives of contractors met with the Revenue's personal taxation division. Discussions were said to be confrontational and poorly organised.
Under the IR35 proposal, made with the Chancellor's March Budget, contractors could be treated as full-time staff when taxed, from next April. Freelancers can currently minimise national insurance contributions, by paying themselves through the lightly-taxed dividends of their personal companies, rather than through salary.
Contractors, facing a tax bill of around a quarter of their current net income, have reacted furiously to the proposal, with more than 2,200 joining a campaign to lobby the government.
The Revenue said last month that contractors working independently will continue with their current tax regime, but those reporting to a line-manager within contracts will be taxed as employees from April 2000. But the Revenue appeared to have softened its line, said Mike Cullen, chairman of the British Computer Society's contractors group.
"I think the Revenue has realised that the old master-servant relationship, encapsulated in line management reporting, is not always applicable to project-based work," he said.
There was also progress on whether companies will have to deduct the taxes before they reach the contractor, he believed. "What the Revenue is looking at now is issuing contractors with registration numbers," said Cullen. "Providing the client has asked for that registration number, they can pay the contractor gross."
The Inland Revenue asked Cullen and others to make a further written submission on how to decide who will be hit by IR35.
However, chartered accountant Tim Warr, who attended the meeting yesterday, said the Revenue's request should not create a false sense of security for contractors. "It is willing to listen to alternatives, but I think it will stick with its original idea," he said.
"This is happening because ministers want it to happen, and it's a fairness issue, not money," added Warr. "Their ideal is that all contractors should be employed as permanent staff."
Meanwhile, in the House of Lords last night, several peers attacked the government proposals. Three Conservative and a Liberal Democrat peer took issue with contractor taxes, despite the debate covering a wide number of issues, including stakeholder pensions and benefits for disabled people.
Lib Dem peer Lord Goodhart said some of the representations he had received on IR35 were "undoubtedly self-serving and should be rejected."
Although the Lords approved the Bill in general, it will next go to its committee stage, when individual elements are examined in detail. It is likely the IR35 clauses will be debated separately by the House of Lords at this point.
The Professional Contractors' Group today said it has signed up former Commons speaker Lord Weatherill, a prestigious figure in the Lords, to its cause.
A Regulatory Impact Assessment, carried out recently by the Department of Social Security, said between 33,000 and 66,000 small services firms of the kind used by contractors will be affected by the IR35 move, with most forced to close.
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