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In the past, the Paymaster General, Dawn Primarolo, has tried to defend the measure on behalf of the Government with standard and general responses. However, the latest criticism in the third Report of the Treasury Select Committee (para 46, February 1) is seen as a specific indictment of the Treasury's failure to consult on the issue and subsequent introduction of legislation which is unfair and inefficient.
Chairman of the PCG, Gareth Williams, said: "The Treasury Select Committee has now added its voice to many influential bodies who can see that IR35 is neither fair nor efficient. The Report specifically mentions IR35, in the context of 'failing to achieve' a 'fair and efficient' tax system.
"For more than a year we have been aware that the Treasury failed to consult on IR35 in accordance with the terms set out in its own Better Regulation Guide. Now the Report also recognises 'that tax reforms are too often undertaken without adequate analysis of the likely effects; and that consultation on detailed tax reforms is not yet regarded as standard practice'. (para 46)"
"It is a shameful 'end-of-term' report in which the Treasury is told by the Select Committee that 'it could do better', while the respected Tax Faculty of the Institute of Chartered Accountants only gave it three out of ten following the introduction of IR35."
IR35 was announced in a press notice after the March 1999 Budget. It treats small businesses in the knowledge-based sector as ‘disguised employees’ for tax and NI purposes, thereby preventing them from operating on similar terms to their larger competitors.
The PCG
The Professional Contractors Groupwas formed in May 1999 to lobby against the Government’s IR35 proposals. It is a non-party political group and its patrons are cross-bench peer, Lord Weatherill, former Speaker of the House of Commons and industrial guru Sir John Harvey-Jones. Since its formation it has evolved into the representative body for independent contractors from many disciplines including IT and engineering on many issues affecting the knowledge-based sector. It is the fastest growing trade association in the country and now has more than 11,000 members. The PCG is challenging the validity of IR35 in a judicial review in the High Court on March 13-15 2001.
Para 46
Paragraph 46 of the Report says: "The peer review of the Inland Revenue's policy-making capacity should demonstrate to Treasury Ministers and officials that a more hands-on approach by the Treasury to tax policy is now required. Recent problems with detailed tax policies, such as the IR35 proposals for countering tax avoidance in the provision of personal services, and the review of double taxation relief for companies, point in the same direction. We firmly believe that in the area of tax policy the Treasury could do better. We recommend that the Treasury give more attention to this area in order to ensure that the tax system is 'fair and efficient', one of the Treasury's PSA objectives."
PCG's letter to Prime Minister
For the personal attention of the Prime Minister
10 Downing Street
London SW1
Dear Prime Minister,
In response to our letter of November 6, we were most disappointed to have received a reply from your Paymaster General, which simply repeats the sound-bite justifications for IR35 with which we are already familiar.
Given your recent restatement of your commitment to the knowledge economy, we had hoped to receive your own considered response to this matter.
In the light of the concern expressed by the Treasury Select Committee (Third Report - February 1) about the lack of fairness and efficiency in the Treasury and their reference to IR35 as an example of this failing, perhaps we can encourage you to take a personal interest in this damaging matter.
The Select Committee is not alone in its view. The IR35 legislation has been condemned as 'unfair and unreasonable' by the ICEAW whose Tax Faculty gave it a poor three out of ten marking. The FSB and the CBI have called it 'unfair, poorly targetted and ultimately unworkable' and have called for it to be withdrawn. And thousands of members of the PCG have written to their MPs to illustrate the damage IR35 is bringing to their small businesses.
By way of illustration, under IR35, 150,000 small knowledge based companies will have to pay for their training budget out of taxed income. A more damaging blow to the knowledge economy would be hard to imagine.
We must dispute the Paymaster General's assertion that PCG made no constructive suggestions following our meeting with her in December 1999. We did in fact suggest the damage to the knowlege economy could be reduced by delaying IR35 for one year, and by introducing transitional arrangements to allow genuine consultancies greater certainty in judging whether they would be affected. These suggestions she chose to ignore.
The PCG has co-ordinated the efforts of over 11,000 professionals affected by this legislation, and has received permission for judicial review, despite vigorous opposition from the Inland Revenue. We will be presenting our case before the High Court in March to fight for our right to run our small businesses in the same way that our larger competitors operate.
Meanwhile many of the most qualified and experienced technologists in the UK are leaving these shores. These people operate real businesses with cutting edge skills. It is unthinkable that the UK can have any position in the knowledge-based economy when the best of our best are taking their skills overseas.
Under these circumstances we do not find it adequate to receive a reply from the Minister responsible for this debacle, who clearly does not understand the economic issues involved, and whose response is to order the band to keep playing while the Titanic sinks.
We would urge you to take personal charge of this matter, and step in to end the uncertainty for the small knowledge-based consultancies that this legislation is unjustly attacking.
I am releasing this letter to the press.
Yours sincerely
Gareth Williams
Chairman
Professional Contractors Group
February 2, 2001
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Susie Hughes
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