Tax chaos threatens business deals

Up to 66,000 small businesses could be affected by the government’s personal services company crackdown, announced in the Budget and aimed at employees masquerading as contractors.

As they waited for clarification on the issue from Paymaster General Dawn Primarolo this week, tax experts, who argue many legitimate businesses will be hit, warned prolonged delays in clarifying how the crackdown will operate was starting to cause real problems.

Chartered Tax adviser Anne Redston, of Ernst & Young, said: ‘The uncertainty is beginning to damage business because contractors are refusing to sign contracts running beyond next March.’

The new rules are supposed to take effect from next April, but it is unclear how contractors will be affected. Some are refusing to make firm agreements because they don’t know whether they will still be operating as businesses. The IT and engineering sectors have been hit particularly badly.

The warning came as the construction industry plunged into chaos with the introduction of its new tax scheme.

Fears are growing that it could delay large construction projects such as the Millennium Dome as, under the scheme, contractors are forbidden to pay subcontractors who have not signed up.

It is feared some may simply just walk off jobs, or leave legitimate projects for the shadow economy, thus defeating the main aim of the new system, which is to reduce tax evasion.

The Inland Revenue said it would open tax offices this weekend to cope with the 1 August deadline, and has extended its emergency temporary registration scheme until 5 November. Up to 250,000 of those hit have yet to apply.

Richard Shooter, of Henstock Shooter, warned the Revenue was using the exercise to force some of the genuinely self-employed into PAYE.

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