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80% of UK Government IT Projects Suffer Delays Due To Tax Clampdown (theregister.co.uk)
An anonymous reader shares a report: The vast majority of UK government IT projects are suffering delays due to freelancers quitting over the IR35 tax clampdown, according to a survey of contractors. Of 405 IT freelancers surveyed by Contractor Calculator, 79 per cent said the projects they have been working on were delayed as a result of contractors leaving. In April, the government shifted responsibility for compliance with the IR35 legislation from the individual contractor to the public body or recruitment agency. The Treasury says it hopes to raise $240m for 2017/18 by bringing public sector contractors within the scope of the legislation. However, the overall number of freelancers leaving as a result of the changes is lower than previously thought, with 48 per cent jumping ship. In previous surveys more than 80 per cent had threatened to walk once the changes came into force. Half of the contractors who decided to stay managed to find a way of working outside the IR35 changes, with a further 13 per cent working within the scope of IR35 but negotiating a rate increase. The rest seemingly took the changes on the chin.
This isn/t really "misclassified" contractors. This is a case of IT contractors using a tax loophole, the government closing that tax loophole many years ago, then IT contractors trying to weasel out of it illegally. The change happened years ago, and the government has been explicitly telling people for at least seven years not to pull the "IR35-proof contract" bullshit that doesn't work, but plenty still try.
Basically, the issue is this: organisations employ contractors who act like employees, but want to pay tax like corporations. So they set up a one-person business and write contracts that on paper attempt to swerve around the IR35 legislation. But the government has basically said that it doesn't matter what the contract states if neither party actually adhere to it because you're basically just disguising an employee and evading tax.
If you're a software developer doing work for company A, you previously (many years ago) had two options:
1) Be employed directly by company A. Pay income tax plus national insurance (like EI)
2) Start a one-man consulting company C, which has a contract with company A. Take most of your income as dividends, avoiding paying any national insurance. Also deduct expenses like car travel, lunches ("business meetings"), cell phone and monthly plan ("business phone") etc etc. The combination of dividend tax and corporation tax used to be a fair bit lower than income tax as well.
IR35 aims to prevent option 2 and they recently put more effort into enforcing it. As with many tax laws, it is riddled with "grey area" loopholes that many people still manage to exploit.
> IR35 aims to prevent option 2 and they recently put more effort into enforcing it.
> As with many tax laws, it is riddled with "grey area" loopholes that many people still manage to exploit.
I contracted for 15+ yrs in London finance - 1998-2013. The original impetus for IR35 was the large consultancy firms lobbying the government. They were upset that a large "army" of freelancers were able to provide the sort of temporary labor on projects that consultancies typically made money from. Contractors initially found easy ways to stick within the law even after being pursued legally. There was the clumsy (and potentially illegal) attempt to retrospectively re-interpret S660A (the ability of spouses holding an interest in the company to get dividends) - going against the standard interpretation which had existed for literally hundreds of years.
"Red" Dawn Primarolo also made the argument that IR35 would bring in a lot of tax dollars. It didn't.
It simply reduced the mobility, size & availability of a previously highly skilled workforce for hire.
The government eventually got its way through gradual attrition & rhetoric - you could reasonably argue that it had the upper moral hand. However, the effect has been exactly as predicted - much less labor mobility & the gradual diminishment of IT capability in London. Luckily in some senses it coincides with the downturn of investment banking since 2008, so the effects have not been so drastic. That capability won't return.
I eventually decided that the tide was turning against me, so I quit work in London & moved to the US where I'm not the chief architect of a $20bn+ company. Yeah, I guess the UK government got what it desired, but perhaps it had other effects not so desired...