Bad tax

As an excuse for getting away from the expenses scandal I thought I'd report on a different Freedom of Information outcome.

The Professional Contractors Group made an FOI request on IR35 legislation. For those of you not in the know, IR35 was introduced in 2000, in order to retrieve more money off small companies - mainly single person companies - working is as contractors and consultants to other larger companies.

Operating as a consultant within your own company can have some tax benefits, as employees of the consulting company would take a reduced salary but larger dividends. The IR35 legislation was intended to change this tax status, so that the consultants would be deemed to be acting as employees of the larger company. In this case, the tax man would take an extra amount.

In many of the cases I've heard about, the actual tax paid by the small consulting company in corporation tax, income tax, national insurance and VAT was practically the same as permanent employees in the same industry.

Still the tax man has an army of investigators checking whether the consultants acted as employees so that they can take more money. The consultants have to employ accountants and lawyers to check through contracts, to make sure that they are worded correctly, and provide insurance against any tax claims. A whole industry has developed around the IR35 legislation, and thousands of people are used.

So after all this rigmarole, how much has the tax man taken in increased money? £9.2 million between 2002 and 2008 or roughly one million pounds a year. The Government had hoped to take £220 million in national insurance contributions alone. Out of 1468 investigations which the PGC were involved with, only 6 included extra money being paid to the Government.

What a waste of time and money, I would hazard a guess that the extra effort to pursue all these investigations has cost more than £1 million a year, so the whole exercise is counter-productive.

IR35 legislation, which has always open to obfuscation and confusion, should be withdrawn and I hope the Tories will do so when they get elected.

I can see the same effects happening if the 50% tax rate is applied. Tax laws need to be simpler and less open to avoidance. The tax take will actually go up, live long good tax, die a death bad tax.

Squiffy.