IT Contractors and Employers Face Government Tax “Disguised Employment” Clampdown

With the latest budget this week there is one piece of news for IT companies that is not going to be met with the joyous enthusiasm of an Apple product launch. In a bid to find £400 million it is reported that the Chancellor George Osborne will be turning the tax spotlight onto IT Contractors as part of what has been publicised as a wider move to close what has been seen in recent years as a tax loophole. This latest tax clampdown could in theory affect many freelancers.

What Loophole?

The reported loophole that is about to be closed relates to those estimated 100,000 people in a variety of industries who have their salaries paid through what are known as ‘personal services companies’. These are essentially limited companies that contract workers can use, one of the benefits being they cut their income tax and National Insurance bills. Although the use of personal services companies may have been intended to help temporary workers and those on short-term contracts, critics have highlighted how the practice could be a way ain which long-term workers for an organisation and the organisation itself can lower tax and costs.

The Chancellor’s reported justification for clamping down on this rests on fairness i.e. whether it is fair that 2 people who work alongside each other should be paying different rates of tax because one is paying more tax by being officially ‘on the books’, while another is paying less tax by using the personal services company route.

Not New

The desire by government to get more contributions from those being paid this way dates back as far as 1999 when Chancellor Gordon Brown introduced IR35 tax legislation to tax what has been described as “disguised employment” at a rate similar to actual employment.

In the light of the Chancellor being faced with lower economic growth than expected that produced an £18 billion black hole in the public finances that needs to be filled, and with the doors closing on some of the planned ways to raise money e.g. not being able now to draw upon the £34billion pot of tax relief for pensions savings, the Chancellor is now being forced to look elsewhere.

Losing Out On Other Benefits

Those contractors, including those in the IT sector who are once again finding themselves at risk of higher tax bills argue that although they pay less tax using personal services companies they don’t receive other benefits that full time employees receive such as Holiday Pay.

What Does This Mean For Your Business?

If the Chancellor’s plans go ahead as expected, as an employer the onus will be on you to determine whether those working for you are full time employees and to put them on the payroll accordingly. If you are a contractor this could cause complications in your relationship with that employer who may be reluctant to suddenly take more people onto the books, thus increasing that employer’s costs and responsibilities. If / when you are taken on as a full time employee it could mean that you will end up having to pay more tax than when you were a contractor, but also receive the benefit of things like Holiday Pay.