IT contractors are set to be hit in another tax crackdown in the Budget this week with the news, leaked over the weekend, of plans for a clampdown on the number of people using personal service companies.
The clampdown is being pitched as an attack on a tax loophole used by top stars and senior mandarins, but much of the £400m that George Osborne expects to raise as a result of the measure will come from ordinary freelancers, including IT contractors, rather than millionaire television stars.
The clampdown is expected to affect as many as 100,000 people.
Under the leaked proposal, employers will be required to determine whether their staff are full-time employees, and not temporary workers, and put them on the payroll accordingly.
A government source reportedly told the Daily Mail: "You have situations where someone working in a public body pays thousands of pounds less in tax than someone doing exactly the same job alongside them who's taxed as an employee. That can't be fair - either on the taxpayer or their fellow workers. We are going to put a stop to it."
The focus on contractors follows a Conservative backbench revolt over Osborne's plans to slash pension tax relief, with the Chancellor casting around for various ways in which he can raise money from taxpayers to close the stubbornly high budget deficit.
As many as 20,000 people in the public sector alone - many of them freelance IT contractors on short-term contracts - are believed to be paid via personal service companies.
In 2010 in the run-up to the election, the Conservatives had promised to review the IR35 rules should they be elected in May 2010. However, the coalition government made few changes to the rules, while Osborne is set to effectively expand them and enforce them even more rigorously.
In 1999, the-then Chancellor Gordon Brown introduced IR35 in a bid to crackdown on people either effectively being employed full-time or spending a year or more in the same employment. The aim of IR35 was to increase the level of tax and national insurance paid by people being paid via personal service companies.
IR35 - named after the 35th budget press release that year - came into force in April 2000. It was introduced to prevent workers from setting up limited companies through which they would work and be paid, avoiding national insurance and pay reduced taxes.
The IR35 measure was intended to "look through" this contractual arrangement and to apply the law to the actualité of the relationship between employer and contractor.
However, its introduction caused a storm of protest among IT contractors, who pointed out that they do not benefit from holiday pay and a slew of other benefits enjoyed by the full-time employed.
Other tax-raising measures on Osborne's agenda that will affect contractors include plans to increase insurance premium tax on car insurance from 9.5 per cent to 12.5 per cent. Osborne is also planning to raise the threshold for the 40 per cent tax rate. More and more people have been drawn in to this tax band as successive governments have failed to raise it in line with rising wages.
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