In a report published this week, the All Party Parliamentary Small Business Group (APPSBG) warned that contractors are being driven overseas because of the tax, which the group says is also putting a significant extra cost on businesses.
In short, the APPSBG's message is that IR35 -- which was introduced in April 2000 as a way of closing a tax-avoidance loophole -- appears to be far from acceptable in its present form.
"The Government should carry out a detailed review of IR35 to ensure that the costs in terms of the impact on the freelancer market are justified by the benefits in terms of the taxation impact," recommended the APPSBG, adding that "there is little real evidence that IR35 has proved cost effective in terms of dealing with tax avoidance without also impacting genuine businesses."
The APPSBG also warned that IR35 is demotivating freelancers, and could drive many of them out of the UK altogether.
Under IR35, self-employed contract workers are treated as employees for tax and National Insurance contributions. The government says this will clamp down on the "Friday to Monday" syndrome. This is a tax scam in which someone resigns from a full-time job but carries on doing the same work as a contractor -- meaning they earn more as less tax has to be paid.
The Professional Contractors Group was set up to fight IR35, eventually losing a legal battle to have the tax overturned.
IR35 is levied by the Inland Revenue, who received criticism from the APPSBG report for the way it enforces the tax.
"Regulations, in particular IR35 and more recently section 660A, have and are having a very adverse effect on freelancers. They have created great uncertainty, due to the inherently subjective nature of the legislation and the, at times, apparently arbitrary application of the legislation by the Inland Revenue," concluded the APPSBG.
Section 660A is a tax law that tries to combat the practice where the husband or wife of a self-employed worker receives a dividend or other profits from that company, and thus pays tax at a lower rate than their self-employed partner.
Some contractors attempt to get around IR35 by using "IR35-friendly contracts". They were warned earlier this year that such contracts are illegal, and could land them in jail.
Opponents of IR35 have claimed that it is unfair that contractors are taxed as if they are full-time employees, but don't also receive the benefits enjoyed by permanent staff -- such as holiday and sick pay. The APPSBG would like the government to address this issue.
"IR35 is not providing any increased employment rights for workers. Clients have no incentive to either engage with freelancers on a truly self employed basis or to replace freelancers with permanent employees. Thought should be given to whether more can be done to aligning employment status with tax status in IR35 situations where workers are clearly disguised employees," the MPs recommended.
The full APPSBG report can be seen at its Web site.
