Review of 1999: Taxation - IR35 and all that

It contained proposals to attack ‘consultants’ who, in the eyes of the tax-man, were escaping their fair share of tax and national insurance by ‘masquerading’ as self-employed contractors.

These proposals sparked off one of the most remarkable protests in recent tax history.

Groups representing IT consultants and engineering contractors, those most directly affected by the proposals, roared into action with headline-grabbing scare stories about a mass brain-drain of IT experts just as the UK was getting to grips with the millennium bug and the rise of e-commerce.

More restrained protests from accountancy and tax groups argued the government was using a ‘sledgehammer to crack a nut’ and that thousands of legitimate businesses would be affected.

There were two other aspects of the protest, however, that could have a significant impact on the future of tax legislation.

First, opposition to the proposals was centered on the internet, with dedicated websites providing a cheap and easy-to-manage focus for widespread opposition.Secondly, the proposals caused a large number of disparate professional groups to unite in opposition.

All this had some effect in persuading the government to dilute it proposals, although the crackdown is still going ahead.

The government should have learnt, however, how the internet can provide a cheap and easily-organised focus for opposition to its tax policies.

IR35 also helped the UK’s professional and business groups and institutes learn how to cooperate – another lesson for the government.

The IR35 saga helped to deflect attention away from the tax issue that was dominating the headlines last year – that of tax harmonisation.Although full EU tax harmonisation is some way off, a number of developments during 1999 have made it a more likely prospect.

In April, the Inland Revenue caved into the European Court of Justice on the ICI v Colmer case on group relief, signalling the growing impact of ECJ case law on national tax regimes.

The EU continued to crack down on tax incentives it deemed to be ‘illegal state aid’. Among the victims was the UK’s much-vaunted capital allowances incentive for investment in Northern Ireland.

This had been announced as part of the government’s investment in the peace process, but the government was forced to withdraw it after behind-the-scenes battles with Brussels.

Meanwhile, just about everyone, including UK MPs, the OECD and EU, started to increase pressure on ‘tax havens’ over their low tax rates.

It will be interesting to see how the UK’s crown dependencies, the Channel Islands and the Isle of Man, stand up to the pressure next year.

CHARITY TAX

Taxation has dominated the past year in the charity sector. And initial hopes have led to despair.

As the sector gears up for improved financial management, more accountants than ever before are moving into voluntary sector finance.

But it is a tough task facing many charity finance directors.VAT has been the sector’s main bugbear this year following the withdrawal of Advance Corporation Tax. Charities now lose around £500m a year on top of the £400m they are forced to pay in irrecoverable VAT.

This year was supposed to herald a new dawn in charity taxation following the publication of the joint Customs and Revenue review. But when the consultation document was finally published – a year late – charity FDs and experts in the firms were left disappointed.

For charity VAT the year ended on a slightly higher note. The Treasury announced a number of new measures affecting the tax regime, which will be introduced from April next year.

As expected, the focus was very much on additional incentives for giving and the complete abolition of the Gift Aid limit went further than many in the sector expected.

But despite this glimmer of hope, charities remain disappointed on the issue of VAT. They may be able to get better incentives for people to donate but charities are still losing out on VAT and the government is doing nothing, save use European legislation as a smoke-screen.