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Shout99.com - Freelancers Outside IR35

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Why doesn't Mr Brown like small firms?
by Susie Hughes at 13:22 27/03/07 (Viewpoint)
Anyone running a small business must be wondering what they've done to upset the Chancellor. If there was a league table for the winners and losers from the Budget, they would certainly be somewhere in the lower regions of the Vauxhall Conference League.
This time, it not just 'whinging contractors' who are noticing. The Institute for Fiscal Studies said: "We have a rate-cutting, base-broadening reform for large companies, but a base-reducing, rate-raising reform for small companies.

Since 1999 a quick recap of some of the Chancellor's initiatives towards small businesses, particularly freelancers, reveals:

  • IR35 - a new tax targeted at freelancers who displayed ambiguous 'employee traits' rather than 'real business traits'
  • Section 660 - an old tax given a new spin to prevent married couple's sharing the benefits of running a small business
  • IR591/dividend tax - a U-turn by the Chancellor to reverse a zero per cent tax break on small businesses after the Government claimed 'they were taking advantage of it'
  • Corporation tax - this week's rise in corporation tax for small firms while cutting it for the larger corporations
  • Managed Service Companies - proposals to hit the businesses who supply services to small firms - and the contractors who use them - by reclassifying small businesses as 'employees' for tax purposes and making third parties responsible for debts
  • Anti-avoidance regulations - a reporting system aimed specifically at identifying firms offering legitimate tax planning
  • Construction Industry Scheme - a measure to move more small businesses in the construction industry into 'employee status' by a process of registration and regulation.

All this runs in tandem with Government initiatives to create an entrepreneurial country and acknowledgements that small businesses are essential to the economic well-being of the UK.

Symptoms not the cause
So why does the Treasury seem to have it in for small businesses? If simple answer is that they don't see it like that. In a Treasury mindset, these measures are not aimed at attacking small businesses, they are aimed at attacking people who are pretending to be small businesses for tax purposes.

In short, they are the symptoms not the cause. The cause is that Mr Brown, his Ministers and many Treasury officials don't accept that someone who sets up a company; takes risks; forgoes the safety net of a large corporate structure - and then sits at a someone else's desk selling his or her knowledge without any desire to grow a business beyond the limits of their personal expertise and experience is a 'genuine business'.

They miss the point that, in many cases, incorporation is the only legal and practical alternative for many freelancers. In other cases, it's a choice which is legitimately open to them, just as it is to a carpenter, a restaurateur or a small manufacturer.

Casting the net wide
Few would argue that there was not an abuse which needed to be tackled originally. The initial intention of IR35 was to catch the 'Friday-to-Monday' scenario - those people who left employment on a Friday, then returned to the same desk doing the same job on a Monday - but this time as a consultant.

But somewhere along the line that objective was shelved and IR35 became a more general measure. The problem with it was that it was - and is - a bad piece of legislation. It was never clear, it was never black and white, it was never enforceable with any consistency.

Consequently, the lack of clarity and uncertainty allowed some contractors and some more unscrupulous providers to drive a coach and horses through the legislation in some cases and completely ignore it in others.

Once again the net has been cast wide and contractors and their service providers are all being tarred with the same brush.

Part of the responsibility for this mess must lie with the Government for introducing a bad piece of legislation in the first place. They have all but admitted that. If IR35 worked, there would not be a need for the new Managed Service Companies provisions.

But part of the responsibility also lies within the sector. Working at Shout99 I am aware of some service providers who are meticulous in their compliance regime and do the Revenue's job for them. I am also aware of others who push beyond the boundaries of what is acceptable to the Revenue. The Revenue doesn't seem to have the resources to clamp down on the 'bad apples', so has gone for the entire tree.
Small businesses comprise 99 per cent of firms in the UK - but, by their defintion and disparate nature - there is no way they can exercise the same clout as multi-nationals or large corporations when it comes to influencing policy. And it's not just individual policy initiatives which need influencing, it is an entire political mind-set.

As the Chancellor prepares for the short move next door, it is doubtful that the message from the 'top' will change. The Government will continue to tackle the symptoms of a confused sector with increasingly confused regulations.

Unless the Government acknowledges that freelancers are 'genuine businesses' rather than 'disguised employees'; and freelancers, their representative bodies and service providers can demonstrate it and convince them of the fact, the dividing lines will remain entrenched and freelancers should continue to expect more of the same.

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Susie Hughes Shout99 2007

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