IT contractors in taxman's crosshairs again

IT contractors who thought they had escaped the Inland Revenue's IR35 tax clampdown on freelancers by registering as a limited company could be hit by new tax proposals in the Budget later this month.

Accounting firm the JSA Group claims that a new tax proposal, dubbed "IR591", in the pre-budget report indicates that the Treasury is on the warpath for those who it believes wrongly escaped the IR35 tax changes.

The report says the government will bring forward specific proposals for action in Budget 2004 "to ensure that the right amount of tax is paid by owner-managers of small incorporated businesses on the profits extracted from their company".

IR35 was intended to stop independent IT contractors who were all but employees of the company they were contracted to from claiming the tax and National Insurance benefits available for small businesses.

The full details will be revealed in the Chancellor's Budget speech on 17 March. Barry Roback, CEO of the JSA Group, claims it is likely to take the form of some kind of tax or National Insurance on the dividends owners take out of their businesses.

"It is aimed at taking more tax from those not caught by IR35," he told silicon.com.

Roback warned that the government's proposals could hit the UK IT market just as demand for contractors and specialists is starting to pick up as organisations increase investment in new technologies.

"It couldn't have come at a worse time and it is going to have some effect on the supply side and on things like rates," he said.

A straw poll being run on the JSA website shows 58 per cent of respondents are "extremely concerned" by the proposals in "IR591".