IR35: Keeping the Inland Revenue off your back...

IR35 has faced huge opposition from many IT industry workers, many of whom believe it will penalise them for no good reason. Worried you're among them? Then read on for a handy Q&A penned by David Smith, the founding director of specialist accountancy firm Accountax. (This article first appeared on http://www.it-director.com )

Could you firstly tell me the basic premise of IR35?
Certainly. IR35, which got its name from the Inland Revenue press release announcing it - which was number 35 - basically says that: If you are really an employee of your client then you should be taxed and you can't get around that by saying that you are self-employed or by contracting yourself through your own limited company.

Okay, can you now tell me a little about contractors and where they fit into the IR35 equation?
A lot of the contractors that you come across nowadays are people who were made redundant in the late 80s and early 90s and couldn't find work. Instead of sitting around they got up, formed their own limited companies, trained themselves up on all the latest technologies and set themselves up with a nice little business doing contracts for other organisations - things like project management, programming etc. Then IR35 came around and, to many of the contractors, it looked like a personal assault. Senior government figures were talking about IR35 in the same breath as tax cheats and it all become very emotive. To the contractors that had just spent the past ten years building a solid foundation, with the backing of the government and its support for the entrepreneur, it looked like a personal assault.

I recall stories in the press talking about IR35 trying to catch the tax cheats, is that why it was brought in?
No not at all. The IR35 regulations were fist thought of in the 80s but were dropped because they were just too complex. When they came back around they were implemented simply because the government wanted to generate more tax revenues - and that's not a political statement at all - that's a fact. IR35 is all about increasing revenues, it's not a personal assault on tech workers or anything like that, it's a plain and simple numbers game.

But surely people were abusing the system previously?
I imagine some people were abusing the system - and I have no sympathy for them. But the majority were doing everything within the law. You hear nowadays of people talking about contractors saying that they were taking money out of their own limited companies in the form of dividends rather than a pay packet. And some people think that this was abuse of the system. But there was absolutely nothing wrong with doing that, the law said you could do that so people did it and that is not abuse of the system at all. I think people forget that these contractors and small businesses did an awful lot for the UK they were spending a lot of money on training and technologies and they were keeping many businesses up to date through their own investments.

For the second part of this article, click here: http://www.silicon.com/a49610