The accountancy bodies and other professional organisations have argued that this is a new - and unfair interpretation - of an old law which was never intended for this purpose.

The decision of the Special Commissioners was particularly controversial - as the two Commissioners disagreed with each other with the senior of the two holding the 'casting vote'.

The case is due to be appealed in March 2005.

IR35
Then a week later, the High Court backed the Inland Revenue in an attempt to appeal another Special Commissioners decision that found against a small business on IR35 issues. In that case, the Commissioners had placed weight on 'a hypothetical contract'.

The upshot of these two cases is that, for the individuals concerned, these two small businesses could face hefty tax bills. The wider implications is that the freelancer community - those small businesses who sell their knowledge to clients - have to try to run their businesses in an uncertain environment and a fear that they might be next on the Revenue's 'hit list'.

The problem
Much of this problem seems to stem from a political conviction within the Treasury that these small entrepreneurial businesses aren't 'real businesses'. In the past, words like 'tax cheats' and accusations of depriving the public services of much needed money have been thrown at this sector of the population.

The Government increasingly talks about clamping down on 'tax avoidance' and attempting to criminalise those who operate in this manner in the eyes of the public. They omit to mention that 'tax avoidance' is a perfectly legal way of arranging one's financial affairs. It is not the same as 'tax evasion'. (See: When a tax 'avoider' becomes an 'evader' - March 2004, Shout99)

Another tactic which came in for strong criticism from the professional bodies was a circular which the Revenue sent to tens of thousands of small businesses indicating that there could be an error on their tax returns, but not saying what it was. In short, it was little more than a 'fishing exercise', which caused concern among many who received it.

Entrepreneurial society
Barely a week passes without a Government Ministers promoting the entrepreneurial society or launching a new initiative to attempt to boost small businesses. Yet in reality it is the nature of some of the Government's own policies that are strangling many of these small businesses at birth or making their owners find it too difficult to continue to operate.

Society and technology has moved on. The working culture now is that of flexibility and mobility. It therefore stands to reason that many entrepreneurial people will use this to operate their own businesses. The new generation of small businesses is not traditional tradesmen, craftsmen or shopkeepers.

The small businesses of the future will involve people who sell their knowledge and experience on short term contracts as consultants, whether in information technology; engineering; business management; financial management or a whole range of other specialist areas of expertise.

This not only provides a valuable resource to large corporations; but also will ultimately benefit the UK economy and the position of the UK as a global competitor.

But unless there is a political acceptance that the small, owner-managed company operating in the knowledge-based economy is as legitimate a small business as a butcher, a baker or a candle-stick maker, then a huge opportunity will pass by for would-be entrepreneurs and for the UK economy.

Article originally written for Effective Consulting Magazine by Susie Hughes, editor of Shout99.

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Susie Hughes © Shout99.com 2005