The controversial new laws that enacted the Inland Revenue's clampdown on personal services companies - which received royal assent last week - will simply lead to contractors putting up their rates to offset the higher tax, according to the IT industry. The Institution of Analysts and Programmers, representing those most likely to be hit by the proposals, said the new law was 'disastrous' and should be scrapped. A spokesman said: 'The majority of people in IT will just put their rates up to cover the tax so that the employers will pay more. It's just transferring from one heap to another.' He added that the measures would polarise direct contractors, between the better off and the poorly paid. The aspect of IR35 which was pushed through by the government after initially being sent back by the Lords, is part of the Welfare Reform and Pensions Act. This part applies only to the treatment of national insurance contributions. The proposals concerning tax will come into force after next year's Finance Bill. At the heart of IR35 is an attempt to crack down on one-person services companies - individuals who, while ostensibly acting as employees of a company, avoid PAYE by instead charging for their services under a contract. While these are mainly high-paid technical, engineering and managerial staff, the category can include such people as nurses and hospital cleaners. Under the Welfare Reform and Pensions Act, many businesses using one-person services companies will have to pay both employer and employee NICs. Following limited government concessions, some one-person services companies will continue to be self-employed. The central question for the tax authorities in deciding whether the new rules apply to an engagement is whether the worker would have been an employee of the client if engaged directly. Courts have traditionally said that a worker is not an employee unless there is a right to exercise 'control' over him or her. However, a person who has the freedom to choose whether to do the job himself, or hire someone else to do the job for him, or help him, is probably self-employed, said the courts. As things currently stand, employment status is defined by decisions through the courts rather than by statute. The government said the status rules will apply to people working through services companies in exactly the same way as they are currently applied to people working directly for their clients. The Revenue has produced guidance on the current state of the law affecting people in the IT and engineering industries, though it accepts 'there is some uncertainty at the borderline'. Paymaster general Dawn Primarolo has stoutly defended the measures, saying that there has been a recent increase in the number of people 'side-stepping the tax and national insurance rules' and paying less than they should by setting up a one-person company. She said: 'We don't think that's fair to other employees who have to pay more as a result.' Primarolo said the government did not want to stop people working through service companies. 'We recognise that many people who work as consultants use service companies to deal with clients in a way which provides a flexible supply of skilled manpower with the minimum of bureaucracy,' she said. But the tax and NI that people pay should not be vastly different depending on whether they choose to operate through a service company or as an individual. She said one of the groups campaigning against the change says its members earn an average of £45 an hour - £1,800 a week. 'Yet they can pay no national insurance contributions at all; less than a nurse, a teacher or a self-employed plumber.' Primarolo also denied the accusation that the government had not consulted business about the change. She said the government announced its intention to tackle the problem in this year's Budget - a year before the new rules are due to come into effect. The Inland Revenue sent out 18,000 copies of the proposals and held two consultative meetings attended by 38 representative bodies. The government has received over 1,700 comments. Primarolo said: 'We have listened to these comments and amended our proposals to take account of some legitimate concerns. But I have no sympathy for those who have been profiting unfairly from the present arrangements and whose complaint is simply that they don't want to pay their fair share of tax.' A spokesman for the English ICA said the final opportunities to make changes to the new rules were past. 'That was the last time to influence the legislation. The only hope will be to scrap it,' he said. The spokesman added that there was a grey area regarding the legislation, which was not clear cut. 'There are going to be a lot of people who see their tax situation radically changed.' He added: 'IT-sector workers are very mobile. It's not difficult for them to up sticks and go to a more friendly regime - though they may swap this one for a worse one.' The spokesman said it was a case of 'wait and see' over whether or not there would be amendments to the legislation after it becomes law. 'There will be, if hundreds of thousands of people move abroad.' The Institution of Analysts and Programmers also believes there will have to be change eventually. A spokesman for the organisation said: 'Many people realise what a disastrous proposal it was. It will continue to be watered down.' The institution's view is endorsed by Tim Conway of the Computer Services and Software Association. 'Overall, we can see what the government was trying to do, and its concern about tax avoidance.' But he added: 'If people are going to start going offshore to work as a result of IR35, then we'll have to say to the government, "we have to do something".' Conway said it was an irony that the chancellor had announced a number of tax measures to help the IT industry in the pre-Budget report, yet any help would be more than outweighed by the extra revenue from IR35. 'The Lord has giveth but he's also taken away.' There has also been surprise that the move has come at the same time as Gordon Brown, in an unadvertised pre-Budget move, revealed plans to make it easier for overseas IT specialists to work in the UK, despite the fears that personal services companies would be forced abroad. The government said IT workers were to be added to the list of 'work-permit shortage' occupations. Ernst & Young's tax director Alastair Kendrick said: 'It seems ironic that at a time when we seem to be exporting personal services companies, we are importing labour.' WHY IR35 WILL NOT HIT 'HENRY', ENGINEER Consultant engineer Henry works through his own company for a large manufacturing business. He has undertaken a review of a production line and is contracted to design productivity improvements. Henry has a free hand over how his work is carried out (although there is a deadline of three months for completion). However he must keep the client informed about progress and the client can ask him to modify proposals. Henry is paid £70 an hour but there is a ceiling of 300 hours on the work. If he takes longer he will only be paid if there are any unforeseen problems. There is no restriction in the contract on Henry or his company providing services to others. The Inland Revenue's conclusions are: - Henry is a skilled worker who has been engaged to carry out a specific task and control over him is limited. He is paid an hourly rate but there is a limit within which the work must be done. - The engagement is for three months and the company has other clients. Some important equipment is supplied by the company and the work is mainly carried out away from client premises. - Henry would have been self-employed if engaged directly by the client and the new rules will not apply. IR35: THE FULL STORY The whole personal services controversy began on Budget day, 9 March 1999, when concealed among the huge batch of Inland Revenue press releases was one entitled Countering Avoidance in the Provision of Personal Services. It was number 35 in the batch. The proposal, said the statement, 'underlines the government's commitment to achieving a tax system under which everyone pays their fair share'. The Inland Revenue would be 'discussing the practical application of new legislation with interested parties'. It was announced then that the new rules would take effect from April 2000, although there is usually no notice of anti-avoidance legislation. In April, a discussion document was posted to interested parties, stressing the new rules would not prevent individuals from setting up service companies. Months of discussion began among a whole host of concerned trades and professions - IT and engineering consultants, bankers, retailers and even representatives from the world of entertainment were mobilised. Most complained that little notice was taken of what they said, and few were placated. Meanwhile, in July, the House of Lords was discussing various amendments to IR35, now due for enactment in the Welfare Reform and Pensions Bill. On September 23, the government announced revised proposals 'which respond to concerns expressed that the rules were too wide in scope' and companies could not go through intermediaries even if they wanted to pay the right tax and national insurance. The revisions declared the rules would rely on the existing tests for employment and self-employment, and that responsibility for ensuring the correct tax and national insurance were paid now belonged to the intermediary and not the client. This month, the House of Lords, after initially throwing the Bill out, had it thrown straight back again by the Commons and was forced to let it through. Shortly afterwards, the first of the IR35 changes became law. This part of the legislation relates solely to payment of national insurance contributions. The rest of the legislation, particularly concerning taxation, will be enacted with the next Finance Bill, as originally planned. WHY IR35 WILL HIT 'GORDON', IT CONTRACTOR IT contractor Gordon works through his own service company. The client is a large retail concern and Gordon works as part of a support team for the payroll system. The client has the right to tell him 'how' the work should be carried out - though in practice that is not normally necessary. He must also work a regular 40-hour week on the premises. Gordon's company is paid an hourly rate. Any extra hours worked are paid at 1.5 times the normal rate. The client pays monthly after an invoice from the company. The Inland Revenue's conclusions are: - The engagement is fairly long, there is extensive right of control and he must carry out the services personally. - The only pointers to self-employment are the minimal financial risk from invoicing, the ability to work for others, and the existence of a business organisation for other clients. - Therefore the engagement is one which would have been an employment had it been directly between Gordon and the client. The common intention for self-employment does not alter that. While it would have proved decisive in a borderline situation, a review of other factors clearly points to employment here. The new rules would apply to the engagement.
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