IT contractors face tax charge changes

Many IT contractors will need to change how they do business or pay higher taxes, according to tax accountants and leading figures in the IT recruitment sector.

New tax rules, which were announced by the Treasury in December's pre-budget report will come into affect on 6th April this year. The new rules affect contractors - including IT workers - working under the guise of a managed services company (MSC).

An MSC is an intermediary company which handles the exchange of work and wages, as opposed to a freelance employee setting up their own limited company. Contractors using this method gain tax advantages on par with a private corporation without taking the risks or responsibilities of starting their own business.

In its consultation document, the Treasury wrote: "Even if an individual is working through a company but the underlying nature of the contract is one of employment, tax and national insurance contributions (NIC) should be paid at employed levels. But in the vast majority of cases, MSCs are not complying with this legislation."

Rather than making MSCs illegal, the Treasury is simply removing the financial advantage. Under the new rules, the 250,000 contractors working through an MSC would pay the same NIC and taxes on their salary as a full-time employee.

Concerns about the changes, were aired yesterday at a packed meeting held by the Recruitment and Employment Confederation (REC).

"There were a lot of concerns. Some were allayed, some will be passed on to the Treasury," said Les Berridge, the REC spokesperson for IT and Comms committee.

One of the major concerns regards timing. The consultation ends March 2nd and the legislation comes into force on April 6th. "It's hard to offer advice to contractors until the legislation is released," Berridge said.

The worst complaints focus not on IT contractors, but on other workers and recruitment agencies. Hands-on workers, such as those in construction, may be unable to avoid higher taxes while recruiters may face higher responsibility when their placed workers don't pay their taxes. "There are some good things in the legislation, and although there are quite a few concerns, they aren't in IT," Berridge added.

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But to do it properly, contractors need not pay more taxes, said Damian Broughton, director of accountancy firm DanBro. "It will change how contractors have to do things, but there shouldn't be any change in pay," Broughton said. "There are more obligations on the contractor and more administrative work, but it shouldn't affect take home pay."

Broughton said the new legislation will spell the end of managed services companies. "We're advising clients that it's not going to be tax efficient via a managed company or composite company, as they'll be taxed like a normal employee," he said.

Alan Williams, managing director of accountancy firm Nixon Williams, warns that after April, contractors with umbrella companies may not be able to claim expenses. "There are some doubts regarding umbrella companies as well, due to a possible restriction on expenses," he said. "Some of the attack on MSCs may apply to umbrella arrangements."

Whichever method IT contractors choose, they are in no danger of losing out to permanent employees, says Berridge. "The need for them will continue. Companies need a flexible workforce. Contractors are a good way to get high-end employees quickly and cost less than permanent staff."