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UK Contractors Not Ready For New Tax Regime, Says Survey

by Robert Lee, Tax-News.com, London

03 April 2007


Web-site ContractorCalculator reported last week on a survey of UK contractors showing that a majority of them are unprepared for changes to the tax regime coming into effect on 6th April.

ContractorCalculator.co.uk offers a range of services for contractors including calculators for a variety of tasks from calculating taxes and net pay through to comparing contract rates and the effects of the deadly IR35 legislation. In addition the site contains an extensive knowledge base of information for first time and existing contractors.

Proposals in last year's Pre-Budget report to clamp down on 'Managed Service Companies' - much used by independent contractors to avoid the effects 1999's ‘IR35’ legislation which allows the Inland Revenue to tax some contractors as though they are employees of their clients - were substantially amended in Gordon Brown's 2007 budget, leading to confusion over the best route to take to minimize tax.

Typically, MSCs consist of a composite company in which a framework allows a number of unrelated individuals to provide services to third parties; each individual holds shares in the composite company, and the dividends on those shares represent the earnings accruing to the composite company in respect of the individual's work. The Treasury's original proposals would have directly targeted the individuals working through such companies; after consultation, the revised proposals now target the promoters of the MSC.

Responses to the survey from nearly 300 contractors show some surprising results:

  • Only 51% of contractors run a limited company;
  • 29% are using composite companies;
  • 56% of those affected say they don't know what to do.

Says Dave Chaplin, CEO of ContractorCalculator.co.uk: “April 6th is not far off. If contractors opt for a limited company - which should be the only logical choice for contractors who pass IR35 - then they should realise that setting up a company, especially a company bank account and VAT number, takes time and so they need to take action NOW.''

The risk of acting without a full understanding of the issues is considerable, because a contractor could wind up losing a sizeable percentage of income, or falling into non-compliance.


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