Select Committee on European Union Written Evidence

Memorandum by the Professional Contractors Group (PCG)

  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.


  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 "" 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 tax system.

  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.

Increased Costs

  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 small businesses.

  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 in e-commerce.


  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.

March 2000

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