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Contractors a vital part of UK recovery, agree tax experts at PCG-sponsored event

The contribution contractors are making to the recovery of the UK economy was acknowledged at a round table event on the future of taxation, jointly hosted by the Professional Contractors Group (PCG) and the Reform think-tank.

With an opening presentation by Liberal Democrat MP Jeremy Browne, Shadow Chief Secretary to the Treasury, yesterday’s event was attended by key stakeholders from the business and taxation sector, including industry and professional bodies, academics, service firms and leading industry experts, among them ContractorCalculator’s CEO Dave Chaplin.

“We’re seeing the gradual realisation that the flexible workforce may be the saviours of the UK economy,” commented Chaplin. “So rather than discouraging flexible working with punitive taxation, such as IR35, contractors and freelancers should be encouraged with a reduction in business regulation.”

Delegates were presented with the bleak scenario that, unless tackled rapidly, the UK’s public sector debt mountain will cripple the economy for decades, potentially resulting in the collapse of sterling and the bond market if global investors lose faith in UK PLC.

IR35 repeal or amendment?

As a result, now is not the time to stifle the flexible workforce and to recognise that small businesses are the engines for growth. As Chaplin puts it, “One of the key ways to encourage prosperity is by removing the costs of unnecessary regulation and applying a fairer, clearly understood, taxation regime.”

So that ideas could be freely debated, the event was held under the Chatham House Rule, meaning that the contributions of individual speakers cannot be disclosed. According to Chaplin, delegates proposed numerous initiatives that could ease the burden on contractors and freelancers. “Repealing or amending IR35 and reducing business regulation were some of the more obvious solutions proposed,” continues Chaplin, “but the need for better tests to define and identify employees versus contractors was covered, as was building the infrastructure for flexible working by ensuring broadband is available to all.”

One of the key ways to encourage prosperity is by removing the costs of unnecessary regulation and applying a fairer, clearly understood, taxation regime

Dave Chaplin, ContractorCalculator

And any regime would need to ensure organisations have flexibility to take on, and shed, workers at short notice in response to need, but also ensure vulnerable workers are not exploited by a casual ‘hire and fire’ attitude on the part of end-user clients.

IR35 – expensive and ineffective

The general view of delegates was that IR35 does not work and that HMRC gains little real value from its continued efforts to gain greater tax yields from contractors and freelancers. It was suggested that IR35 costs the Treasury more than is gained from additional tax yields.

As a former City IT contractor and now CEO of ContractorCalculator, Chaplin explained to delegates the realities of IR35’s early days, and the relative ease with which it can now be defeated by contractors willing to invest some effort.

“When IR35 was first launched, there were approximately 20% of contractors definitely outside it, 20% almost certainly inside it and a huge grey area in the middle,” he says. “Now the grey area is much smaller as contractors, and their professional advisers, have learned how to stay within IR35’s vague rules and avoid falling foul of even the most over-zealous of tax inspectors.”

Taxation is here to stay

Whilst IR35 in its current form is considered to be unworkable and expensive for all concerned, delegates, who included some of the foremost tax authorities in the UK, accepted that a replacement would have to be found to ensure limited companies were not used solely as tax efficiency dodges for disguised employees.

In addition, a widespread overhaul of the UK’s tax system would prove very challenging, as the current welfare and state system are structured around existing taxation laws and codes.

And it was considered essential that any regime maximises the opportunities for small firms and the flexible workforce to be successful and therefore contribute to filling the hole in public finances. There was acknowledgement that businesses at crucial stages of growth often could not afford to employ a worker and that a contractor or freelancer was an ideal alternative.

“The government now, and administrations in the future, must make some very tough choices, such as the decision to delay the implementation of the Agency Workers Directive revealed today, if we are to see a reversal in our economic fortunes,” concludes Chaplin. “I am delighted that so many delegates to this Reform-PCG roundtable event recognise the vital contribution contractors and freelancers are making, and will continue to make, to restoring confidence in UK PLC.”

Published: 15 October 2009

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