Memorandum by the Professional Contractors
The Professional Contractors Group (PCG) appreciates
this opportunity to present evidence and comment on the subject
of e-Commerce: Policy Development and Co-ordination in the EU.
Many of the members of the Professional Contractors
Group are now engaged in the e-commerce sector providing services
and skills for their own start-up companies or contracting services
to other companies.
We welcome the appointment by the Government
of a Minister for e-commerce and an E-Envoy and the work they
are conducting in order to initiate and promote the knowledge
economy and e-commerce in the UK.
However, the PCG feel that these initiatives
will have been undermined by the new IR35 tax legislation announced
by the Treasury which will take affect from 6 April 2000.
1. WHAT NEEDS
We believe that small companies and a flexible
work force should be key factors in driving forward e-commerce
in the UK. The recent growth of the "dot.com" companies
is evidence of this.
IR35 will use the self-employment tests to determine
the level of tax that small companies will have to pay, but there
is not sufficient and clear case law in existence to allow workers
in the new knowledge economy selling skills and knowledge any
degree of certainty in establishing their tax treatment.
We will not rehearse all our objections to IR35
here, but will concentrate on its likely effects on e-commerce
and the developing knowledge economy. Fundamentally we believe
the Government has failed to understand the operation of the contract
sector and is using a quite inappropriate criterion of self-employment
when the real question is one of outsourcing and an unbalanced
Given the use of the employment tests in the
legislation, we are particularly concerned that the Inland Revenue
guidance on IR35 does not give sufficient weight to factors pointing
away from employment such as the right of a small company to provide
an alternative consultant, and gives unjustifiable emphasis to
factors such as the length of a contract, and payment by the hour,
in an apparent attempt to bring as much of the IT contract sector
under IR35 as possible.
As a consequence many small businesses working
in the knowledge-based sector that do not satisfy any reasonable
definition of "disguised employment" risk falling foul
of the new IR35 legislation. This will have the following impact
on these small businesses:
They will suffer a proportionately
much higher tax burden that their larger competitors;
Companies will not be able to fund
research and development projects nor employ extra staff using
revenue raised from contracts that fail the IR35 legislation;
Companies will not be able to undergo
expansion using any retained profit;
Companies will not be able to build
upon or develop any equity in their business;
Companies will not be able to claim
the same business expenses as their larger competitors; and
IR35 legislation will discourage
potential entrepreneurs within the UK and the EU from starting
up a business.
The PCG thinks that the huge implications brought
about by this ill-conceived legislation will severely hamper the
future growth of e-commerce in the UK and that this will likewise
damage the ability of the UK to compete within the EU.
The Importance of Outsourcing
The developing sector of e-commerce demonstrates
the importance of outsourcing to the knowledge economy. Businesses
with little experience of IT will have to engage external consultants
to providee-commerce solutions. These consultants require the
flexibility to work closely with their client over a period of
months, to fully understand their client's businesses and needs,
and to integrate the most appropriatee-commerce solution with
the client's existing operations. This is exactly the kind of
engagement which (when carried out by a small business where the
employees each own more than 5 per cent of the shares) risks being
classified as "disguised employment" under IR35.
Lack of Certainty
All businesses need to know with certainty what
their likely tax position will be before they start to trade.
The IR35 legislation means that after 18 months at least or at
worst six years could elapse before the Revenue challenges the
status of that contract under IR35. Companies starting a new e-commerce
business will not want to run this risk.
Loss of Skilled Workers
The impending effects of IR35 legislation have
affected the viability of the contract market over the last three
months in the UK.
Many IT contractors have already left the UK,
a significant number of individuals will leave in the coming tax
year, and many more will leave in a continuing stream such that
the replacement of key individuals who have left or not returned
to the UK will take decades to recover from.
The recent announcement from the Home Office
that fast track visas are to be provided for skilled IT workers
from underdeveloped countries shows that the Government expects
an exodus of skilled workers from the UK and this is presumably
the only way of making up the short fall.
A skills shortage in the UK will hamper "start-up"
companies because they will find it difficult to hire specialist
knowledge and skilled workers for short-term contracts.
If the effect of IR35 is to reduce the number
of small independent IT consultancies, this will force increased
reliance on the large international consultancies (which will
not be hit by IR35 since their staff do not own 5 per cent of
the companies' shares) which charge considerably higher rates.
The cost to business of taking up e-commerce will increase, and
the take-up rate will therefore be slowed.
IR35 will not deliver the Government's vision
of enterprise and expansion of the UK's fledgling e-commerce businesses
into a global economy but will unfortunately discriminate against
The PCG aims to support individuals that are
willing to form and develop their own businesses, in many cases
employing staff and diversifying. IR35 will prevent and hinder
this process. The uncertainty thatIR35 will create over a company's
tax position will not create confidence and will hold back developments
QUESTIONS 2-6 GENERAL
The Internet/e-commerce is a fundamental part
of the free movement of goods and services throughout the EU and
the rest of the world.
The Internet is a global medium and the ability
of individual governments to regulate it unilaterally is severely
limited. Where trade is concerned, conventions which apply only
within one jurisdiction will be limiting.
Within the EU, e-commerce should take its place
alongside other forms of trade within the Single Market, and provisions
for e-commerce should be incorporated into existing legislation
regarding the free movement of goods and services.
At the minimum a single set of regulations for
the validity of Internet payments, transactions and contracts
throughout the EU should be developed.
However it must also be recognised that in a
global medium EU borders are of little more relevance than those
of individual States. Effective measures to promote e-commerce
must be undertaken supra-nationally, both at the level of the
EU and of global international agreements.