TaxPersonal TaxIR35 focus: ‘If I stay here, I’ll go out of business’

IR35 focus: 'If I stay here, I'll go out of business'

Condemned as unfair and anti-competitive, IR35 is causing a new brain-drain.

When Richard Marriott contemplates the future of his working life, it is with the sure knowledge that he will spend a great deal of it working abroad and away from his family.

In fact Marriott is due to leave for the USA in August where he will work as an IT consultant, a job he used to do from his Redditch home.

But he says he is not leaving Britain by choice, but because he has been driven abroad by the government’s new IR35 tax rule.

Believing the regulation will up his tax rate to more than 50%, Marriott is just one of a number of IR35 exiles fleeing Britain to find better rates of tax and, hopefully, a route to maintaining their way of life – even if that means leaving behind family life.

Marriott says he will be ‘put out of business’ and ‘I either work abroad and sustain the lifestyle we’re used to, or stay here and go out of business.

‘I’ll have to leave my wife and family behind for months at a time. But I honestly don’t see – if you are subject to IR35 – how you stay in business.

‘My wife’s not too happy. But we have school fees and a mortgage to pay.’

Marriott has two daughters, one studying medicine and one about to do A-levels. Both, he believes, could be drastically affected if he stays in the country and attempts to live with IR35.

IR35 is intended to hit contractors operating through service companies where they are the sole employee. The Inland Revenue claims consultants like Marriott are in truth ’employees’ not bona fide contractors.

The new regulation states that where someone owns more than five per cent of a company for which they work, 95% of their income will be considered as salary and liable to PAYE, employers’ and employees’ NICs contributions.

Crippling for business
The extra tax payable could be crippling for a small business. Marriott estimates he would pay an extra £10,000-£15,000 per annum. A terrifying amount in anybody’s book.

The five per cent tax is intended for expenses and contractors. Marriott says it will come no where near the annual cost of new training, new equipment, accountancy fees and liability insurance most will need.

Marriott says: ‘I am running a business, I am an employee of that business, not the “deemed employee” of my client. How can I possibly be the “deemed employee” of my clients when I receive none of the benefits accorded to the permanent employees?’

Now Marriott plans to register a company in the Republic of Ireland to invoice his clients in the USA.

Marriott is not alone. Another case is Steve Allan, of Peterborough, who ran a small IT consultancy employing nine people which he wound up just before Christmas as a direct result, he says, of his fears about IR35.

Allan says the Revenue convinced him that because he worked on site for clients himself, alongside his employees, the entire fee for his company’s work would be subject to IR35 rules and therefore subject to income tax as well as employers’ and employees’ NICs.

From whatever was left he would then have to pay his workers’ salaries making a second set of national insurance contributions. The prospect of the onerous administration and additional costs convinced him that he could not continue under IR35.

‘I didn’t know what was going to happen or how I was going to trade,’ he says.

He now plans to work for companies in Dubai and Hong Kong while invoicing through a company registered in the USA.

There are any number of examples. Stuart Ranson’s weekly journey, since he started working in the Dutch town of Enschede, would make even the most hardened commuter wince.

Long distance
Driven from working in Britain by IR35 in January, he spends weekends at his Hertfordshire home and then leaves for work in the Netherlands.

Sunday night sees him leave home at around 6.30pm for Luton airport from where he takes a 40 minute flight to Schipol. He arrives at his apartment at around midnight.

At the end of the week he leaves work in Enschede at around 5pm to take the flight to Luton. Needless to say he arrives home late.

The weekly commute to the Netherlands where he is currently contracted to Ericsson means leaving his girlfriend alone in the home they share but he says there was no other option for him once IR35 was introduced.

‘I moved into a larger house and suddenly it happened. Every part of my life is now focused on travelling. Living away from home you can’t do things in the garden and you can’t have a social life. I don’t see much of my girlfriend but if I worked in England I would go out of business.

‘I’m upset and aggrieved. Labour is all about penalising people who do well. And they really are hammering at that, which is bizarre when you hear Tony Blair on the one hand saying “we support e-commerce, we support industry,'”and then take £1bn from small business.

‘I also feel victimised. We’ve have been called tax cheats by the government.

I pay more tax than most taxpayers so how can I be a tax cheat?’

Ranson receives a hefty tax break for working in the Netherlands where the government gives a 35% tax allowance for certain skills. It makes for a much more attractive prospect than struggling with IR35, he says.

When he flies home on a Friday night he meets other Britons putting themselves through the same ‘strenuous’ commute as a result, they say, of IR35.

However the unanswered question is the future. Ranson says he ‘just doesn’t know’ where he’ll end up but for now it is certainly in the Netherlands.

Rebel alliance
The Professional Contractor’s Group, a body specifically created to lobby for contractors working through service companies estimates the flight of experts from Britain is slowly, but surely, turning into an exodus.

Anywhere between 30% and 50% of contractors are thought to be making their way to foreign shores for work, according to the PCG.

According to a survey by the group only around 40% will stay here, with the Netherlands and the USA proving among the most popular destinations.

IT, engineering, oil and gas, and other industries could all be affected.

Brian Curnow, vice chairman of the PCG’s campaigns committee describes a situation that is taking a heavy human toll.

Suicide, or threats of it, has been spoken of in the same breath as IR35, so have marriage breakups along with the rush for overseas jobs, he says.

The PCG’s reaction however has been to start a fighting fund, already up to £500,000, to retain a QC to launch an attempt to seek a judicial review of the new regulation. The High Court is expected to hear an application for the review in October. Curnow says the case could make its way to the European Court.

‘Within two years we could have a ruling on the grounds that what they are doing is discriminatory to small business,’ says Curnow.

And there, for Marriott, Allan and the PCG, is the key issue. Small one-man bands will no longer be able to compete alongside the much larger consultancies that will not be subject to the new regulation.

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