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Government commits to replace IR35

IR35 looks certain to be replaced, with the new government promising that it will “review IR35…and seek to replace it with simpler measures.” This means contractors may, within the lifetime of the current five-year parliament, be free from the ongoing uncertainty over their tax status.

However, as ContractorCalculator CEO Dave Chaplin warns: “Contractors should save any celebrations until after we know the details of the review and what the new rules will be, because greater clarity over contractors’ status might come at the expense of more contractors paying more tax.”

In ‘Freedom Fairness Responsibility’, the document that details the coalition’s plans for this parliament, the government goes on to confirm that IR35’s replacement measures will “prevent tax avoidance but not place undue administrative burdens or uncertainty on the self employed, or restrict labour market flexibility.”

PCG lobbying campaign wins through

According to PCG, today’s announcement will be welcomed by contractors and freelancers throughout the UK, and is a triumph for common sense over dogma.

PCG’s multilevel and cross-party lobbying campaign has paid dividends, believes PCG Managing Director John Brazier, who says: “We are delighted that the new coalition government made this commitment to review IR35 as a priority only days after taking power. PCG has led the way in seeking the abolition of IR35 on behalf of our members. It has caused great heartache to many people. The cost in distress has been high, but the revenue for HMRC has been minimal.”

He adds: “For the last ten years, PCG has campaigned for honesty and fairness when dealing with the UK’s 1.4 m contractors and freelance workers. With the end of the iniquitous IR35 we have the opportunity for fairness.

When and how will IR35 be replaced

IR35 expert Kate Cottrell of Bauer and Cottrell welcomed the commitment, but is concerned at the lack of any specific timings. “The coalition’s intentions are laudable, but what we would like to see now is a timetable confirming when measures can be expected.”

Cottrell was also pleased to see the commitment to review employment and workplace laws: “Clearly, any review of employment law would mean that the Agency Workers Regulations could be subject to further scrutiny. The coalition has the time and mandate to effect badly needed changes to the AWR before they come into force in October 2011.

The coalition's intentions are laudable, but what we would like to see now is a timetable confirming when measures can be expected

Kate Cottrell, Bauer and Cottrell

“However,” she continues, “there is no mention of the pre-election commitment to create an Office of Tax Simplification to manage the wealth of business taxation reforms proposed by the coalition and which will require close coordination to ensure they remain the ‘simpler measures’ promised.”

Further contractor-friendly measures announced

The government document promises to slash business regulation by introducing a ‘one-in, one-out’ rule to prevent red tape swamping contractor businesses and forcing regular reviews of existing legislation. It also talks of ending the ‘tick-box’ culture of regulation.

Corporate taxation will be reformed by simplifying reliefs and allowances to enable a reduction in the main corporation tax bands. All contractors will benefit from proposed increases to the basic allowances, although the timetable for introduction is not clear.

A major target is to tackle the public sector deficit, but contractors may have greater ease of access to the dwindling pot through the “aspiration that 25% of government contracts should be awarded to small and medium sized enterprises.”

We are delighted that the new coalition government made this commitment to review IR35 as a priority only days after taking power

John Brazier, PCG

Pressure for contractor recognition must be maintained

Less welcome are measures to increase Capital Gains Tax on non-business capital gains, which will impact heavily on contractors with property portfolios. However, entrepreneurs, which will include some contractors working through their own limited companies, will gain “generous” exemptions.

Chaplin says: “There is no doubt that the new government has made encouraging noises about its future treatment of small businesses in general, and the flexible self-employed workforce specifically. The pressure from bodies like PCG must be maintained to ensure the potential contribution contractors can make to the UK’s economic recovery is both encouraged and acknowledged.”

Published: 20 May 2010

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