The end of Freelance Limited Companies?

An extra £400m could be raised in tax under a plan by ministers to crack down on a loophole exploited by as many as 100,000 people. Ministers are understood to be examining whether to severely tighten the rules of personal service companies before George Osborne’s autumn statement on 25 November.

The special companies are often used to avoid income tax and employee national insurance contributions, costing the exchequer about £400m in lost revenues. Professionals in the media, IT and nursing set up a company to cut their tax to about 20% by offsetting a series of expenses against their earnings.

The Treasury has been examining ways of closing the loophole after publicity surrounding BBC presenters who reduced their tax bills by arranging to be paid through personal service companies. The BBC changed its practices in 2012 after the Commons public accounts committee warned that the corporation could be “complicit” in tax avoidance after it emerged that up to 1,500 presenters, including Fiona Bruce and Jeremy Paxman, were paid through personal service companies. The PAC warned that the BBC could have reduced its employer national insurance contributions (NICs).

The government is examining ways of tightening the rules to ensure that as many as 90% of beneficiaries from personal service companies follow the example of the BBC presenters who were forced to be paid in more conventional ways after a backlash. In 1999 Gordon Brown ordered a clampdown on what are known as “disguised employees” through a scheme known as IR35.

Amid fears that business will complain of fresh regulations, the government is proposing that a consultant using a personal service company would be obliged to move on to the payroll if they work for a business for more than a month. Businesses, rather than the individual, would be responsible for overseeing the rules. An agency would be responsible if they provide consultants to businesses.

The changes would mean that anyone who is not allowed to be paid through a personal service company would have to be paid by PAYE – pay as you earn. They would also pay employee NICs while the company would pay employer NICs.

A government source said: “This is about fairness in the tax system. It is just not fair to have people in the same company doing the same jobs paying different levels of tax.”

The government acknowledges that a small number of professionals will still legitimately use personal service companies. Some IT workers might work for a company for a short period or they might work for multiple companies at the same time. In that case they would not be seen as an employee. Builders doing one job on a private house would be exempt.

But there are understood to be examples of professionals such as lawyers working for one company for a short period of two months. Ministers believe that in these circumstances they should be counted as employees and should pay income tax.

Ministers have yet to make a final decision on whether to introduce the change. They will want to see how businesses respond to the proposal at next week’s annual conference of the CBI.