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| CURRENT SECTION :: IR35 / IR591 | UK's most visited IT Contractor Site - 250k unique visitors March 2008 |
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An interim report into the regulatory tax burdens imposed on UK contractors and small business has exposed IR35 and IR591 as the most unpopular tax laws hitting IT professionals and entrepreneurs. In the report obtained by Contractor UK, the Private Business Forum said out of approximately 500 small firms - half of which were in the computer related sector, 53 per cent rated IR35 as ‘a big problem’ when fulfilling their tax obligations. The second worst offender was the controversial tax ruling on dividend profits, IR591, hitting 40 per cent of respondents struggling to survive from sharper compliance commitments. The telling results, part of the All-Party Parliamentary Small Business Poll, identified small high technology firms as fighting a losing battle when compared against the lesser tax cost per year, necessary for low technology companies. The report states large technology companies, with over 500 employees, pay as little as 15 per cent in yearly overheads whereas, overall turnover for compliance for a small computer related business is almost 30 per cent. Kieron Hayes, SME expert and spokesman for the PBF, told Contractor UK: “The report shows us small business doesn’t benefit as much as big business as far as tax efficiency is concerned. For the smaller companies when we look at controversial tax rule IR35 it’s an ideal example of how actual compliance costs are taxed far higher on the smaller enterprise.” Talking to CUK about disproportionate tax costs, Quay Accounting, a specialist contractor service, explained unfair tax charges on smaller firms was a long-standing problem: "It is not surprising that the survey concludes exactly what the freelance industry has been screaming about since 2000,” said Quay. “The legislation forming the provisions known as IR35 is so poorly drafted and so lacking in precision, as it relates to the “industry” to which it predominately relates, that it is no wonder the cost of compliance has spiralled disproportionately out of control. “Similar arguments have applied to the eagerness that the Inland Revenue now have to apply early 20th century legislation (such as s660) to a 21st century business environment. “The risks of making a wrong decision, in terms of tax liabilities payable, interest and penalties mean that freelance businesses have no option but to seek out specialist advisors who have the technical taxation experience and practical understanding of the industry to interpret the legislation and apply it properly. "Most professional advisors specialising in these areas, such as Quay Accounting, believe that it is wholly unreasonable to expect a small business to possess these skills in house when the Inland Revenue are themselves struggling to get to grips with a balanced and consistent interpretation of the legislation and they have developed services specifically designed to minimise the compliance burden and cost of these laws to freelance workers." The report suggests smaller high technology firms, with less than 20 workers, were less likely to be able to take advantage of tax allowances despite IT companies “being younger, smaller and more profitable.” “Resources, computer equipment and time for a small business are all factors pressing hard on the smaller entrepreneurs,” said Mr Hayes. “The problem is a big business may have a whole department devoted to tax planning and efficiency – they can look to see every advantage that is available to them. They can even take the time to do some – ‘creative accounting.’ “Whereas with a small enterprise it’s often the director just ‘doing the books,’ and realistically they simply haven’t got the resources or time to see the most efficient way of fulfilling their tax obligations. So small firms are automatically disadvantaged by not having the resources larger businesses take for granted.” The findings went onto show that while IR35 remains top of the SME hit list, S660A problems trailed comparatively. The Forum explained that the lesser 29 per cent rate of respondents was in part due to a better awareness from smaller businesses. “What we have seen is that smaller businesses are becoming more aware of how to comply and more vigilant of S660. Of course in many ways, they have been forced by the Revenue.” “It’s a case that smaller companies have had to get their act together because everything else is squeezed out of small enterprise as far as tax compliance is concerned.” The probe into imposing tax rules comes as earlier this month, IR35 hit the headlines with continued pressure in Parliament from Taxation experts that the “ambiguous” rule needs legislative review. Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants, told CUK that IR35 was considered “unnecessary and business unfriendly.” “IR35 demonstrates a lack of commercial understanding by the government in not recognising the risks and rewards which should be a hallmark for those who are running their own business through a limited company. “This is just one more strand in the Government's attack on small businesses while playing the back ground sound track saying how it is a champion for SMEs.” Jul 15, 2004 Email this article Printer friendly page Previous Page
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