IR35 clauses defeated in Lords

Ministers are planning Commons action to reverse last night's Lords rejection of the Inland Revenue's IR35 plans to crack down on one-person IT service companies.

The 84-66 vote against clauses requiring single-person service companies to pay National Insurance Contributions on fee income less specified expenses plus five percent, came shortly before midnight on 13 October.

But the Lords' removal of the IR35 clauses from the Welfare Reform and Pensions Bill could mean a weakening or even dropping of the measure, to ensure passage of the bill before the end of the Parliamentary session in mid-November.

The government also faces Lords difficulties over four other Bills, including the virtual abolition of hereditary peers.

Social Services Secretary Alistair Darling urgently needs his proposals for stakeholder pensions and other welfare reforms on the statute book, and faces another revolt by left-wing Labour MPs over the curbs on benefits for the disabled which it contains.

Lobbyist for freelancers, the Professional Contractors' Group (PCG), was pleased with the outcome. "We have always said we are willing to help the government achieve its aim [of stopping staff moving to one-person companies without moving job] without damaging enterprise," said a spokeswoman for PCG. "That is still the case."

In the debate, Deputy Chief Whip Lord McIntosh of Haringey demanded action to get rid of tax avoidance, insisting: "The idea that we should back down now is simply not acceptable."

"Because one worker chooses to set up a service company, he is somehow an entrepreneur and deserves to pay less tax and NICS," McIntosh said of the current system. "I don't think his colleague at the next desk would agree."

McIntosh said: "Our support for the UK IT industry is on record. Our IT specialists are world leaders, but we do not believe that the payment of a fair level of tax and NICs will wipe out the IT industry or that IT workers will leave the UK as a result of these changes."