What happened to create a U-turn at the 11th hour 59th minute? Or was it never really on the cards anyway?

I had the abolition of IR35 down as one of those things that the Tories would do in their first 100 days in office, something they would symbolically ditch to keep faith with their supporters and show that they could be trusted to keep their promises, just as Labour did when union rights were restored to GCHQ, the minimum wage was brought in and privatised utility companies coughed up the windfall tax.

The Tories have just had their moment with IR35 and have blown it. Sir Humphrey has persuaded them to put caution before principle. They started well setting up of the Office of Tax Simplification and deciding to consult on merging tax and national insurance. Yet, in terms of IR35 we can now see that they were a means of kicking the whole subject into the long grass. At best freelancers hoped for abolition of the tax expected reform, but instead got nothing but tepid words about working more closely together with HMRC. It sounds like a bad joke but the reality dawning on contractors is George Osborne’s U-turn on IR35 is one of bitter disappointment.

During my spells at the Professional Contractors Group, the main trade association that represents freelance workers, we spent a lot of time working through the Gordian knot that is IR35. Obviously the main solution was an Alexandrian one of just slicing it with a sword, but how did it get so tangled up in the first place and how could we stop this from happening again? The problem was and is our antiquated tax system that a high court judge on IR35 commented was one as resembling more of a ‘master-servant relationship’ than anything else. Merging NI and income tax will go a long way to solving this. Having been forced to incorporate as one-person limited companies, freelancers unable to work as self-employed found themselves facing a corporate tax regime and the ability to pay themselves via dividends as well as through PAYE, and in doing so could pay less national insurance.

Labour introduced Limited Liability Partnerships which recognised the need for partnerships to incorporate. At the time I argued to Patricia Hewitt why not have limited liability self-employed? At a stroke it would solve many of the problems and the need for IR35. Hard-core PCG members were not in favour, ‘Labour’, I was told, would be ‘out of office at the next election and there was no need for any compromise’. The Tories would come and everything would be fine. That was in 2003. Now, eight years later, after a bucketfll of pledges from successive Tory leaders and shadow chancellors, the failure of that argument is plain for all to see.

Back in 1999 the Inland Revenue said it would raise £900m and the only cost would be a £50,000 helpline number. But a parliamentary question revealed that between tax years 2002-3 and 2007-8, IR35 directly raised just £9.2 million. This equates to an average of around only £1.5 million per tax year – a tiny sum in government tax terms and a fraction of what the government expected. Yet HMRC has still managed to persuade George that it is ‘a significant revenue stream’. If it isn’t a big revenue stream for government may be it is for someone else?

Originally it was the big consultancies that were fed up of being undercut by freelancers that argued for IR35. They are joined now by a powerful industry of vested interests like umbrella tax companies and tax accountants that profit from compliance with the tax. The PCG was out manoeuvered and failed to make any case for abolition of the tax claiming that ‘vociferous’ voices on the committee talked about what ‘might’ happen if it went.

Contractors feel let down by a lacklustre PCG and betrayed by the Tory-led government. It is true that in the long term the merger of NI and income tax will remove the need for the measure, but that will be years off. All this will be of some surprise to David Cameron who on ‘National Freelancers’ Day’ said of the 1.4m freelancers in the country that as ‘we go for economic growth this government is getting right behind them’, it seems he forgot to tell George.