Contractors working through personal service companies may be intrigued by critical comments from an expert concerning a key proposal in the recent OTS Small Business Tax Review.

The document continues to provoke controversy, with a leading staffing organisation now claiming that one of its central recommendations – the integration of income tax and National Insurance Contributions NICs) – is likely to deter people from considering self-employment or freelancing as a career path.

The Association of Professional Staffing Companies (APSCo) insists that the proposed realignment of income tax and NICs to reduce the present differential between self-employed and employed workers will effectively sabotage the very goal the Government has set so much store by: the encouragement of self-employment. Under present arrangements, self-employed contractors working through limited companies will pay around 15 per cent less tax on their income than employed workers if they pay themselves by dividends. They also pay less in the way of National Insurance Contributions.  The OTS considers this unfair on employees, and thinks the different rates should ultimately be abolished. This would remove the need for IR35 regulations, according to the OTS.

But APSCo considers the proposal to be a retrograde measure which will make contracting considerably less attractive by removing the tax incentive that encourages people to become self-employed in the first place. It would also, the organisation argues, drive employment costs up by millions of pounds.

APSCo’s Chief Executive, Ann Swain, said that limited company contractors were a “vital component” of the UK’s flexible workforce. Changes to IR35 which resulted in deterring people from considering contracting would simply drive up employment costs without generating the economic growth that small businesses are known to deliver.

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