‘Cool-off’ period urged.

He said this was ‘a familiar tax avoidance technique’ but complained that by introducing IR35 the government was creating a larger problem.

Shadow treasury minister Richard Ottaway said a new anomaly was being created under which a separate agent employing consultants to work for a large company and paying them a salary would not be subject to IR35’s provisions for running a business, while if the four dispensed with the agent and formed their own company, each taking a 25% stake, they would be hit.

For the Liberal Democrats, Edward Davey said the government had gone beyond chancellor Gordon Brown’s original justification for IR35.

He complained: ‘People who are to all intents and purposes self-employed will be deemed by the Revenue to have employed status because of the contracts they must sign.’

He argued for a three-month ‘cooling-off period’ from the date the Revenue ruled someone who thought they were self-employed is actually employed, before IR35 takes effect.

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