PRESS RELEASE                                                                          PR/990525/3 sixty

IR 35 Consultation Group – Alive and Well!

"Of all manifestations of power, restraint impresses men the most." – Thucyclides

Rumours of the demise of the IR35 Consultation Group have been much exaggerated. In fact they are completely without substance. Rather than taking a high profile stance, the group has taken a reasoned consultative approach in order to produce a more constructive outcome.

Whilst others in the industry have chosen to look after the interests of specific market sectors, the IR35 Consultation Group continues to represent the broad opinion of the Industry, with input primarily from End Users and Agencies, along with Accountants and Contractors.

The Consultation Group lives up to its name, having entered into a detailed consultation process with a range of affected parties. The research has highlighted a range of previously unidentified issues and unexpected effects if IR35 is implemented in its current form. These effects, along with a range of others, have been highlighted in the Regulatory Impact Survey submitted to the Inland Revenue.

The IR35 Consultation Group was formed at the end of the successful Open Forum meeting on 14^th April 1999, organised by 3 sixty group. Those present at that meeting included John Redwood MP and Dr Vincent Cable MP, along with the CSSA, FEI, FRES, IAP, BCCS (ICC), Engineerjob.com, agencies and end users. All agreed with the proposal by 3 sixty group that there should be an industry wide consultation followed by an effective lobbying campaign based on a reasoned and well presented argument. There was a consensus that the industry would lose if it went into battle with the Government.

Following the meeting 3 sixty group allocated 5 full time members of staff to the cause, appointed a leading Employment Lawyer and took opinion from "Big 6" Tax Experts, as a focal point for the IR35 Consultation Group.

The Group was the first to be notified of last minute Amendments to the Welfare Reform and Pensions Bill by Members of the House. The IR35 Consultation Group was able to highlight to the industry the last minute amendments, which were added to the Bill on Friday 14/05/99 with 24 working hours notice. The group was offered the opportunity both to comment on the amendments and to write alternatives for inclusion in the debate in the Commons. The group was not convinced that they could be fully justified until the completion of the Regulatory Impact Assessment.

The group spent the subsequent weekend briefing MP’s and a wide range of interested parties. The success of the Lobbying activity over the weekend was demonstrated in the debate in the commons by the specific mention of the alternative options proposed by 3 sixty group as pert of the activity carried out by the IR35 Consultation Group.

In a typical extract from the Hansard report of the debate:

"Mrs. Lait: Indeed, and the new clause does not match the Government's own definition of what is good regulation. It is not transparent, there has not been full consultation and there has been no indication of any preparedness to accept alternatives--and there are alternatives.

For instance, the 3 Sixty group, which has been working on behalf of many of those service companies, has come up with at least three alternatives, any one of which would achieve what I am sure the Government want to achieve. First, they could adopt a minimum salary level based on a percentage of the total contract value. Secondly, as happens in Ireland, expenses could be allowed, as now, and all remaining moneys could be paid as a salary, but with employees' National Insurance only. Thirdly, salary level could be based on the multiple of the Government's minimum wage, which I should have thought was a subject dear to their heart. There are other options and they should be considered, instead of using this scatter-gun, blanket approach which has clearly distressed many people and taken their minds off the businesses that they should be running to earn the money that pays the taxes that keep the Government going.

The new clause shows that the Government have not thought through, and are not prepared to consult on, fundamental changes affecting a lot of people who are making this country effective, competitive and up to date. Those people should be able to develop the skills that would make modern projects a byword for and the watchword of this country--an objective that I should have thought the Government would want to proceed with--but the Government are adopting an old-fashioned, old Labour approach that will close down opportunity. That reflects the Government's arrogance and there are no guarantees that people who want to run their businesses in such a way can continue to do so.

I ask again: why the rush, why no consultation and why does such a wide-ranging measure have to be included in the Bill? Conservative Members--and, clearly, the Minister--are unable to understand that."

The group was able to clarify to the interested parties the status of the Welfare Reform and Pensions Bill, as secondary legislation to the Finance Act 2000.

To date the IR35 Consultation Group has:

1. Spoken extensively to the "Parliamentary Draftsman" in the Inland Revenue (Mark Nellthorp) and other Government Departments
2. Held a well attended meeting with MPs, End Users and a range of interested bodies.
3. Carried out a series of closed door meetings with end users
4. Completed a survey of the end users to elicit their opinions and support
5. Researched alternative methods of collection, including overseas experience
6. Lobbied on behalf of the industry with MPs and Key Government Departments
7. Briefed interested parties
8. Met with Contractors and Agencies
9. Produced a regulatory impact assessment for submission to the Inland Revenue

There are few people who would disagree with the introduction of a fairer system, based on a reasonable level of NI contribution. Unfortunately, the proposals, as they currently stand, fail to recognise the full impact on the UK IT Industry and in fact UK plc.

Recent correspondence from the Revenue indicated that where the new rules apply, and the engagement is treated as employment, "The client will account for PAYE/NIC on relevant payments made to the intermediary or to the worker – broadly following existing PAYE/NICs rules." To clarify, this means that the company (who needs the work doing) will have to deduct NICs/PAYE before they pay the agency (supplying the person providing the service). This would only change if "the intermediary will itself account fully for PAYE and NICs."

When we begin to look at the alternatives, we see that the UK is not the first country to go through these changes and several alternatives exist. We could adopt a minimum salary level based on a percentage of total contract value. We could adopt the approach introduced in Ireland where expenses are allowed as now (No tax and NI) and all remaining monies are paid as a salary but with employees NI only. All of these options need research and accurate impact assessment, but it quickly becomes clear that they would have less negative impact on UK Industry than the current Revenue proposals.

It has been estimated that the current bill for policing the PAYE scheme in government is £1.3Bn. Estimates of how much this would increase are varied, but there is widespread agreement that the increase could easily eliminate any additional income derived from the changes.

Why does the industry use contractors?

1. Flexibility
2. The need for specialist skills
3. Speed
4. Reduction in need for internal training
5. Introduction of new ideas/methods

These are based on feedback from end users (but we need more)

What would be the effects if the legislation were passed as proposed?

1. Potential for increased cost to end users if they have to pay NICs and contractors maintain their current earnings requirements
2. Reduced flexibility
3. Risk of penalty for non-compliance
4. Potential loss of resource with contractors lured into Europe where they get a better tax treatment (35% exemption) – A Brain Drain?
5. Loss of competitiveness for UK companies
6. Loss of competitiveness for UK plc as a whole

So how does this fit in with the vision of our current Prime Minister and his Government?

In the White Paper "Our Competitive Future: Building the Knowledge-Driven Economy", published in December 1998 the Government set out the ambitious goal of "developing the UK as the world’s best environment for electronic trading by 2002". They went on in Net Benefit: the electronic commerce agenda for the UK to highlight the fact that electronic commerce is "crucial to the future prosperity of our economy and to the competitive position of our industries. The UK is well placed to play a leading role."

Tony Blair PM himself quoted in his Foreword to "Our information age: The Government’s Vision":

"I want to ensure that everyone in the United Kingdom has the best chance to seize this moment – our information age which offers new opportunities for greater prosperity, and better quality of life.

In this policy statement, we set out our ideas on how the Government will act to enable people to take advantage of the new information age – a co-ordinated strategy which will focus on transforming education, widening access, promoting competition and competitiveness, fostering quality and modernising government."

If we are to see a wholesale change to the current structure of the industry, what then of the Government’s own commitments to have 25% of all contacts with government to be possible electronically by 2002 and 100% by 2008? What of the commitment to a lifetime NHS record being accessible in every Doctors Surgery with NHS Direct and NHSnet offering both advice and bookings of appointments? What of the National Grid for Learning linking all schools to the Internet by 2002 and the University of Industry? The majority of central government contracts are outsourced, relying heavily on contract IT staff. What will be the effect to the public purse if costs increase?

These skills required, and the confidence in the UK IT Industry to meet these commitments was derived from the effectiveness of the current system, and it is one with which the current Government should feel justifiably proud. It is widely reported that the UK is suffering from a major skill shortage with over 100,000 IT positions left unfilled. Will the proposed changes in IR35 improve the situation?

Are we to see the current Government once again introduce a measure which will reduce the effectiveness of our IT industry, possibly put up costs and result in unplanned employment responsibilities for end users.

Working with all sectors of the industry, we represent the views of those End Users and Agencies who employ contractors on the effects of IR35. Please contact Brian Keegan, Iain Sutherland or Sebastian Moore on 0845 20 20 360 for further details.

To register your support please go to http://www.360-group.com/ir35 to receive updates, Press Releases, Positioning Statements and to see the minutes of the Open Forum Meeting.