Budget to close tax loophole which disguises employees as freelancers


A tax loophole widely exploited to disguise employees as freelancers will be reformed in George Osborne's Budget next week.

Civil servants, along with institutions like the BBC and the Bank of England, will be hit by rule changes to stop earners gaining tax advantages by being "off the books".

Around 20,000 public sector workers are avoiding an average of more than £3,500 a year in income tax and National Insurance Contributions under the current system, according to the Government.

Sources claimed that an estimated 90% of earners who should comply with the rules do not.

Under the Chancellor's clampdown, state-backed organisations, instead of the individual, will become responsible for deciding if income should be taxed at source.

New guidelines will also be introduced to make it clearer when employment taxes should be paid.

MPs criticised the BBC in 2012 after it emerged 3,000 people were paid through personal services companies, potentially allowing them to limit their tax liabilities.

The set-up was traditionally used by professional contractors doing short-term work for several firms but is now widely exploited.

Police, councils, the NHS, schools, Whitehall, Network Rail and Channel 4 will also be affected by the changes, which the Government says will ensure colleagues doing the same jobs will be paying the same amount of tax.

A Government source said: "Personal service companies can be legitimate, but we estimate that 90% of people who should comply with the rules, don't. Some may not understand the rules but it's clear others are using them as a way to minimise their tax bills.

"You have situations where someone working in a public body pays thousands of pounds less in tax than someone doing exactly the same job alongside them who's taxed as an employee. That can't be fair - either on the taxpayer or their fellow workers. We are going to put a stop to it."

Former prime minister Gordon Brown introduced an anti-avoidance "IR35 rule" while chancellor in 2000, but the Government says there is evidence of widespread non-compliance.