IR35 gives American déjà vu

The IR35 legislation that penalises independent consultants went to the High Court yesterday and its legality will be upheld or dashed tomorrow. Among the many emails we've received regarding this, however, one caught our eye.

Jay Beyda is an IT veteran who says he was an IT contractor/consultant in the US for 16 years. The current legislation this side of the Altantic has given Jay flashbacks to 1986, he tells us.

In that year, the US government... hang on, we'll let Jay tell you "the US Government passed a rider to the tax code (sub-section 1706, for all you old timers) eliminating the Safe Harbor for 'technical' consultants. Basically, this was equivalent to the IR35 tax code mentioned in your article.

The idea was that if one were an independent contractor performing work such as plumbing or carpentry, one could function as a self-contained business, taking advantage of whatever tax benefits were available. 1706 re-affirmed that the Safe Harbor was still in effect for all types of businesses except for those engaged in the data processing and engineering fields (I honestly don't remember the exact wording). These folks were to be considered as employees going forward, and anyone engaging such a contractor would be liable for the employers portion of taxes, benefits, etc as mandated for employees under Federal Law."

But the similarities don't end there. The IR35 legislation appeared to come from nowhere. Jay says about the 1706 amendment: "this amendment was passed in the 'wee hours', as a minor amendment to some other, completely unrelated, legislation. Rumor abounded as to who was behind this (the largest IT consulting firms in the US were named as possible lobbyists). This was seen as a move to wipe out the independent contractor."

What was the upshot? The IR35 protesters are suggesting that every contract will have to be reviewed individually, that court cases will go through the roof and people will move abroad. Others say that contractors will simply charge more to cover the extra tax.

And as for the US? "A lot of things happened in late 1986 as the result of this legislation. Major corporations engaging consulting firms required that those firms submit affidavits stating that all individuals were employees, and that no sub-contractors were being used. Many (but not all) consulting firms demanded that the independent (or sub-) contractors become employees, and the amount of the billing rate were to be reduced by the employer's expenses. In some cases this amounted to a 30% reduction in hourly rate. It was an awful mess. Many consultants rushed to form corporations and establish themselves as employees of that corporation, but this was not always accepted by the consulting firms or clients. All in all, the lawyers made a lot of money, and the consultants were screwed."

And so what was happened to the US legislation? "Eventually, a lobby was formed, and the law was struck down as being unfair, but that took approx. three years. During that time, the landscape for consulting firms in the US changed quite a bit, and there was a real squeeze on those of us who tries to remain independent. I'm not sure why I'm writing this, except to wish all of the consultants in the UK good luck in this fight."

So there you go. The US technical workplace is still far more advanced than our own, and so it may be said that our current situation and the recently introduced law are very similar to the US example. An interesting precedent?

In the meantime, if anyone has any more information on this 1706 legislation, we'd be interested to see if we can stretch the comparison further. ®

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