Third parties to carry can for contractor taxes

Tough new rules introduced by the
Treasury could see
recruitment companies and employers forced to pay the tax debts of contractors
in their employ.

The new anti-avoidance measures were published yesterday as part of a wider
consultation on tax avoidance by contractors. The announcement follows a similar
announcement in the 2006 pre-Budget report.

The new legislation will target
service company
(MSC) schemes that allow workers to skirt national
insurance and tax contributions. Authorities hope the new measures will net £1bn
of extra tax over the next three years.

An estimated quarter of a million workers – including teachers, nurses,
construction workers, IT specialists and electrical contractors – use MSCs to
manage their professional remuneration in a tax-efficient way.

The structure enables these workers to receive a minimal wage, which is
taxable and subject to national insurance contributions, and the remainder of
their remuneration in the form of dividends which are not subject to national
insurance and attract a lower rate of tax than other forms of income.

‘Whilst this is a welcome move to reduce the level of non-compliance in the
sector, many MSCs are making genuine efforts to be fully compliant with the new
legislation and they and other compliant businesses will be adversely affected
by this legislation,’ said John Chaplin, director of employment taxes at

Further reading:

Pre-Budget report 2006 – our comment

Read more about the rules

Tailby sets his sights on renegade tax boutiques

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