Election special: Blair gives a little under IR35 pressure

The government has admitted it will monitor its notorious IR35 legislation, leaving open the possibility of sweeping changes to the tax on one-man service companies.

Despite a recent win in the High Court, Labour ministers are still on the defensive following pledges from both the Conservatives and Liberal Democrats to scrap the unpopular tax in their election manifestos.

Richard Allen, Liberal Democrat MP and chair of the IT select committee, claimed the government has been heavy-handed. "They risk stifling enterprise," he said.

Ecommerce minister Patricia Hewitt admitted to silicon.com that the introduction of IR35 two years ago was badly handled. "The original proposals on IR35 were much too cumbersome and would have put too much burden on employers as well as contractors," she said.

Hewitt claims the final version got the changes right, but hinted for the first time that the Inland Revenue would be flexible about IR35's future.

"We'll monitor it over the next year just to see how it is working in practice, but quite honestly the very alarmist talk we were getting - from the Conservatives amongst others - of thousands of skilled IT professionals fleeing the country simply hasn't happened," Hewitt claimed.

Conservative spokesman on IT Alan Duncan hit back at the jibe, claiming the need to monitor IR35 was an admission of failure. "It's either a big lie because there is an election on, or a concession which proves we were right all along," he said.

Despite losing their High Court appeal last month, the Professional Contractors Group (PCG) has pledged to continue its fight and expects to hear from the Court of Appeal in the next few weeks.

Tory shadow trade secretary David Heathcoat-Amory blamed Labour's mistakes on a lack of business acumen. "In a way its not surprising that they don't understand business when you consider that none of the DTI ministers in the current government have any business experience whatsoever," he said.

"To them it's just a theory or a bit of a game. So they blunder into ill-thought-out tax changes like IR35."

What the manifestos say:

Conservatives:
"Ostensibly a measure to tackle tax avoidance, it treats entrepreneurs working through personal service companies as "disguised employees". Contractors working in the IT and engineering sectors will be among those most affected. Conservatives have opposed IR35 from the start. A future Conservative Government will repeal IR35 and replace it with legislation that addresses genuine abuses."

Labour:
No mention

Liberal Democrats:
"It has become clear that while there has been some abuse of one person company status, the government's new tax regulations will encompass hundreds of thousands of bona fide contractors who have one person company status because their customers do no wish to employ them on a long term basis. We would repeal this tax and allow 'one person companies' to function and develop. We would act to stop abuse by closing the 'Friday night to Monday morning' loophole by targeted legislation along the lines suggested by the Personal (sic) Contractors Group."

Neither of the opposition parties have so far published a detailed proposal for what would replace IR35.