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Are you a Tory-voting IT contractor? Congrats! Osborne is hiking your taxes

Measures sold as punishing big biz will hit SMEs for six

It's okay, George is listening. Honest

Contractors will be hit by further changes. The budget eliminated employment allowance for small businesses for one-person firms, while the government will shortly publish a discussion document on the IR35 regulations that are meant to define "disguised employment" where a contractor is effectively an employee of a firm, and tax him or her accordingly.

HM Revenue and Customs has already published a consultation on travel and subsistence allowances for individuals working through limited companies.

This discusses the government’s plan to remove these allowances for travel from home to a workplace for those who “look and act like employees", on the basis that most workers cannot claim tax relief on commuting or lunch. It specifically targets those who are working through their own companies and are supervised or directed by an individual.

Comments are invited by 30 September, and any legislative changes will be appear in the chancellor’s autumn statement.

The introduction of IR35 by the Labour government in 1999 triggered the setting up of the Professional Contractors Group, now called the Association of Independent Professionals and the Self-Employed. Its chief executive, Chris Bryce, agrees that contractors should wait to see the details of all these proposals before deciding what to do.

In time, Bryce thinks some contractors will retire or move overseas as a result the changes and fewer will replace them. “It will discourage people from going it alone. At the moment, self-employment is one of the cornerstones of the jobs revival in the UK. The government can’t afford to have these artificial barriers to self-employment imposed on them,” he said.

Bryce reckons IR35 should be abolished rather than (as is expected) toughened, and that reducing the ability of contractors to claim travel and subsistence would give an unfair advantage to big consultancy firms which can claim these as business expenses.

Bryce argues contractors deserve to pay lower taxes than employees, as they do not receive company benefits such as pensions and employment benefits including the right to redundancy payments. “I’d argue the difference in tax regimes reflects the risk you are taking. Otherwise, how do you encourage entrepreneurs?”

The Federation of Small Businesses said the chancellor should make broader changes, with these measures aiming "to reduce the incentives to incorporate, and level the playing field between different tax statuses,” said John Allan, its national chairman.

“As such, they will have an impact on those who have chosen this route and will see an increase in their tax bills," he continued, adding that, "more widely, and as we advocated prior to the budget, we believe such tax changes would be best considered holistically in the context of wider changes in the labour market and the growth of the self-employed.”

It is possible the chancellor will revisit the issue later in this Parliament if these changes deplete the ranks of the self-employed. But his overall plan is to end the deficit between the government’s spending and its income (currently a not-insignificant £70bn) without increasing the best-known taxes.

As well as spending cuts, that means hiking relatively obscure taxes that affect relatively few people – like dividends and limited company contractors. ®

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