£400m in tax could come from personal service company crackdown

Ministers are discussing whether to close a tax loophole that could be costing the Treasury up to £400m and is currently being exploited by as many as 100,000 people.

The rules surrounding how personal service companies are used could be tightened in the run up to Chancellor Osborne’s autumn statement on 25 November.

Offsetting expenses

The issue involves the way that employee national insurance contributions and income tax are levied on professionals across a wide range of industries, ranging from the media and IT right through to nursing.

A service company is a company that has been set up to cut tax amounts due by offsetting a series of expenses against earnings and also taking money as dividends, which only attract tax liability at corporation tax rates.

Employers

It isn't only employees who can benefit under the present system, as employers can avoid or reduce national insurance contributions (NICs).

A government source commented: “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.”

Ministers are likely to take into account how the upcoming annual conference of the CBI reacts to proposals to change the system, as the government does acknowledge that some professionals legitimately use personal service companies.

Gordon Brown tackled the issue as far back as 1999, when he clamped down on “disguised employees” through the IR35 scheme. The new proposals would mean consultants using a personal service company would have to go onto a company's payroll if they worked for a business for over a month.