IR35 starts to bite: Will IT consultants be fleeing the country?

/a> European Court action

has now been launched against the controversial IR35 legislation, which was first announced in the Budget last March. It aimed to close down the loophole for ‘consultants’ who, in the eyes of the taxman, escape their share of tax and national insurance and pose as self-employed contractors.

Despite a year of bitter wrangling, the Treasury today achieves its aim to end the growing practice of employees leaving a company on Friday and turning up as ‘independent consultants’ on Monday to do the same job with the added joy of new tax breaks.

At the heart of the Welfare Reform and Pensions Act, is an attempt to close in on individuals – many of whom are IT and engineering professionals – who run one-person services companies and side-step PAYE by charging for their services under a contract.

Paymaster General Dawn Primarolo has largely stuck to her course in the face of fierce and sustained opposition from within the IT industry as well as the institutes.

A spokesman for the Institution of Analysts and Programmers said, ‘The majority of people in IT will just put their rates up to cover the tax so the employers will pay more’.

And flexible labour markets will be eroded by the new regime, argues managing director Nigel Corby of Global Executives, a leading UK interim management group.

‘Able executives making change happen readily and cost-efficiently are now under threat’, he said.

But, it all must have seemed so clear for the government a year ago-tax evasion was ‘unfair’, created an uneven playing field and potentially left misguided individuals outside employment law and social security benefits.

But, the Bill only won royal assent in November after a rocky passage through Parliament with a Lord’s rebellion that brought limited concessions for some service companies to qualify for self-employed national insurance contributions.

At the beginning of the year, IT industry pundits predicted the new tax rules could force up to 40,000, or 18%, of IT consultants to pack up and clear out of the UK.

The Treasury remains unconvinced, but has written to industry leaders indicating that the Home Office is considering a fast-track visa system for IT experts from Eastern Europe and India to bridge a consultants shortage.

Ernst & Young tax director Alastair Kendrick said: ‘It seems ironic that at a time when we seem to be exporting personal services companies, we are importing labour.’

The Professional Contractors Group, which represents 8,000 IT consultants, has now said it is starting legal action to get IR35 struck out as an infringement of European law.

Time will tell whether a mass exodus is around the corner or the computer industry’s claim is a descendent of Y2K.

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