The IR35 rules contained in the Finance Bill need to be "properly targeted at genuine tax avoidance and not at the normal commercial practice of many businesses, which is to operate as a company with one individual", says the British Chambers of Commerce (BCC) in a statement. The BCC, which represents some 120,000 predominantly small businesses, many of whom could be affected by IR35, was responding to the Revenue press release IR35.
The statement by the BCC goes on to say that whilst it agrees with the closing of tax loopholes generally, it believes that IR35 is uneccessary as no great scam is being exposed: "There are literally thousands of one-man consultant companies that have been operating for a number of years in the way set out in IRPR 35. At a stroke it appears the Government aims to reclassify many of those businesses for tax purposes, so that they or their clients pay more tax and National Insurance Contributions".
The BCC draws attention to the fact that recent Budgets have made incorporation more attractive from a tax point of view, which is at odds with IR35 penalising those who take up the choice. Although IR35 treats consultants as employees, the BCC points out that the employment relationship between a consultant and client is very different to that between employee and employer: "Consultants do not receive the same remuneration packages and benefits that employees do: redundancy pay, fringe benefits such as company cars, training costs and pay during training, etc. Consultants also do not benefit from the security of tenure that an employee has and will often be unemployed for periods between contracts".
One-man companies reflect modern working practices, the BCC says, fearing that IR35 "could severely impact on UK entrepreneurial activity" and over time "will erode skills". BCC predicts "the destruction of many small businesses and less client choice".
BCC offers some possible solutions for the government in order to more accurately target genuine tax avoidance, including cooling off periods for ex-employees of a buisness returning as consultants.
Better consultation is needed, claims BCC, over the proposals. It also points out that with the Treasury hoping to raise only £475m in the tax year 2000/2001 and £375m in 2001/02 through IR35, "this makes it one of the most costly measures for business in the last Budget".
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