Inland Revenue says that changes to the tax regime for freelance workers will distinguish between contractors who work as employees and those who work as independent consultants.
Self employed workers, who account for one in five of the UK's IT workforce, fear the changes will force them to pay a quarter of their current income in extra tax - leading to higher fees and freelancers fleeing to lower tax countries.
The proposed modifications are designed to recover some of the millions of pounds of tax which are avoided by contractors who register themselves as single person service companies.
In a letter to contractors' campaign groups and other interested parties, the Revenue gave the example of two IT contractors. The first has a fixed fee contract with his former employee to undertake a millennium bug health check and will continue to be paid through a lower tax single person company. The second contractor who reports day to day to an IT manager, carrying out tasks as directed, will be taxed as if a full time employee.
Mike Cullen, head of the British Computer Society's contractors' group, said most IT contractors fit the second description. However, he said 'employee' contractors may be able to continue to claim expenses against tax, offsetting the increased national insurance contributions they will face as a byproduct of the tax changes, due next April.
Interested parties will meet with the Revenue in June. Andy White, whose www.engineerjob.com Web site coordinates opposition to the plans, said more than 600 contractors had pledged £50 to set up a lobby group.
For further stories see 6 May issue of Computing
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