Confusion has been spreading through the contracting community in the United Kingdom after the government seemed to be backing off its plans to dismantle the unpopular IR35 regime.

In an interview with the Telegraph in late June, Small Business Minister Mark Prisk strongly implied that the Con-Dem coalition would be following through on pre-election promises made by the Tories to introduce sweeping reforms to the Intermediaries Legislation (more commonly known as IR35, after the Budget release signalling its introduction).

Prior to the introduction of the legislation, an individual could avoid being taxed as an employee on payments for services and paying Class 1 NIC by providing those services through an intermediary. The worker could take the money out of the intermediary, normally a Personal Service Company, in the form of dividends instead of salary, resulting in the worker paying less in NICs than either a conventional employee or a self-employed person, and additionally, removing said income from the Pay As You Earn (PAYE) net. The IR35 regime granted HM Revenue and Customs the ability to look through such arrangements in instances where they deemed that the contractor was in fact a 'disguised employee', and to impose tax at the levels that would be paid by an employed worker.

Prisk told the Telegraph that:

"We want to make sure that we could undertake a comprehensive review of small business taxation in a way that makes the need for the current IR35 legislation redundant. But we want to make sure whatever we change is a lasting settlement. One of the problems with IR35 is that it's a constantly changing set of rules."

This led to rejoicing among contractors, with Chris Bryce, Chairman of the Professional Contractors Group (PCG) announcing following the interview that:

“Our talks with both Parties in the Coalition when they were in Opposition gave us the confidence that if they were in Government they would tackle the problem of IR35. Today I am delighted to say there is now real momentum behind the abolition of IR35. We are delighted that Mark Prisk has said publicly what he has said to us privately and we are very pleased that important organisations like Grant Thornton, FSB and other leading bodies now take the same view as us. There is still much work to be done but we hope we can work with the Government and these other organisations to find a fair and acceptable settlement for all freelancers and contractors.”

However, it now appears that the Small Business Minister may have overstated the coalition government's agenda in this area, with a spokesman from the Department of Business, Innovation and Skills (BIS) telling Shout 99 news that:

"Mark Prisk did the interview several weeks ago. He said that the coalition Government was committed to reviewing and simplifying tax measures for small businesses - and one area that was mentioned was IR35. When asked about specifics, he said that any announcements about tax would be made in the Budget."

Despite disappointment over the apparent climbdown (although a review is still planned), some experts have warned that the dismantling of the IR35 rules might not be the uncomplicated boon to the industry that it is being painted as by some; the government would still want to ensure that contractors were not able to duck their tax liability, and could, for example, decide to require all personal service companies to pay national insurance and income tax contributions on a significant percentage of their fee income.