2010 Budget Could See The End Of Small Business Contractor Tax Hurdle, Ir35

The Chancellor reveals we could see a permanent change to the way that small businesses

, contractors and freelancers are taxed in a review of small business taxation.

This change relates to the so called IR35 legislation which has governed how an individual selling services through a small company is taxed. A review is being undertaken to decide whether this legislation should be abolished.

Due to the complicated nature of the legislation, there has been some confusion over whether some Umbrella Companies are operating entirely within the boundaries of IR35.

In a statement Craig Farley-Jones of OPSL ltd (My-Umbrella) based in Manchester said "There are a number of off shore providers who are currently being investigated by HMRC, ultimately it is the contractors responsibility to check whether their chosen Umbrella Company complies with current HMRC legislation".

Salary paid through an Umbrella Company allows the contractor to offset their tax allowable expenses against their earnings.

Umbrella Companies operate a PAYE system which deducts and keeps records of the expenses claimed. Certain expenses can be claimed without the need to provide receipts but only when the umbrella company is granted this dispensation from HMRC.

It's expected that the abolition of IR35 should make choosing the right payroll provider less of a mine field for contractors.

Mark Prisk Small Business Minister said: "We want to make sure that we could undertake a comprehensive review of small business taxation in a way that makes the need for the current IR35 legislation redundant.

"But we want to make sure whatever we change is a lasting settlement. One of the problems with IR35 is that it's a constantly changing set of rules."

The in depth review is expected to begin in summer 2010 and is thought to affect 1.4m freelancers and contractors.

Francesca Lagerberg Head of Tax at Grant Thornton stated: "The IR35 rules have created problems for over a decade for entrepreneurs using personal service companies and have led to hundreds of tax cases, many of which have been lost by HM Revenue & Customs."

A visiting professor at King's College London, Anne Redston, agreed with The Professional Contractors Group who called for the much needed review. She added: "In this Budget the Government has set out the big picture; now they can start colouring in the details."

Tina Riches, a director at the Chartered Institute of Taxation, added: "Small business tax has long been played on a very uneven pitch. A new groundsman could have a field day in making this a fair competition."

HM Revenue & Customs are to consult with payroll providers to see if a real time system can be set up. In order to reduce costs they will also review how a PAYE system may be adopted.

by: Nelly Hall.

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