Rates for IT contractors could be forced up by new Treasury taxation changes due to come into effect in April, recruitment bodies and accountants have warned.
The Treasury is aiming to tackle what it calls "disguised employment" by contractors who use a managed service company (MSC) to avoid paying the level of national insurance contributions (NICs) and PAYE that those in full employment would.
MSCs are intermediary companies through which the services of a contractor are provided to a client and the contractor is paid in a mixture of wages and dividends. The proposed new legislation would require contractors in MSCs to pay national insurance and PAYE on the full combined wage and dividend payment they receive.
The Treasury estimates it will be able to recover £350m from these changes, which will affect 250,000 workers — not just in the IT sector — who currently work through an MSC.
The Treasury said in its consultation document: "Even if an individual is working through a company but the underlying nature of the contract is one of employment, tax and NICs should be paid at employed levels. But in the vast majority of cases, MSCs are not complying with this legislation. As a result, the strong growth in MSC schemes constitutes a significant and increasing risk to the Exchequer."
The consultation also proposes that when HM Revenue & Customs can't recover unpaid tax from the MSC then third parties such as recruitment agencies would be liable for the bill.
The UK's Recruitment and Employment Confederation (REC) said that while it broadly welcomes the aim of the legislation, the time frame for its introduction is too short.
Marcia Roberts, chief executive of the REC, said: "We would like it to be deferred until October. There should be a sensible approach. I think there's limited understanding of the marketplace. Contractual arrangements will need to be changed and with it being the end of the tax year it couldn't come at a more inconvenient time."
She also warned that contractors will look to recover the tax lost through having to switch to PAYE by hiking up their rates. "Going to PAYE they will charge more for their services because it will have an impact on their tax position," she said.
Barry Roback, chief executive of IT contractor accountants JSA, warned the new legislation will drive taxation non-compliance underground and push up pay rates.
He said: "It is ironic that the proposed legislation, which was intended to deal with miscreants, will actually make life much more difficult for those who already fully comply with tax laws, while making it much easier for those who are persistent tax evaders."
The Treasury's consultation (click here for PDF), which was launched on 6 December, 2006, closes on 2 March, 2007 and is due to come into effect on 6 April, 2007.
A separate study by RM claims almost half (44 percent) of IT workers are considering giving up their full-time jobs to become contractors.
Talkback
I don't see why contractors shouldn't pay NI like the rest of us!
MSCs are used by many as a way of getting someone else to do the massive quantities of paperwork involved in running your own company. The point of taking some of the profit as dividend was meant as an incentive to those who choose to take the risk of going it alone. Brown has now decided that what was originally intended as an incentive by his government is now tax evasion. Moving goalposts much !?
Actually, many of us choose to keep out of this all together by not taking any dividend and taking it through PAYE instead. This of course means we get less out of the deal, but in most cases not by much. Bear in mind that we would pay Corporation Tax on dividend and income & NI tax on PAYE pay. It does however keep the HMRC happy, which, with the powers they have, is a Very Good Thing.
Also bear in mind that we are never going to get anything back from the NI that we pay more of. If my company doesn't do anything for a few months, I am not entitled to any benefits and not all of us are minting it. I for one would make more being a permy, I choose to go it alone for lifestyle reasons.