9 March 1999 - COUNTERING AVOIDANCE IN THE PROVISION OF PERSONAL SERVICES

The Chancellor announced today that changes are to be introduced to counter avoidance in the area of personal service provision. This move underlines the Government's commitment to achieving a tax system under which everyone pays their fair share.

There has for some time been general concern about the hiring of individuals through their own service companies so that they can exploit the fiscal advantages offered by a corporate structure. It is possible for someone to leave work as an employee on a Friday, only to return the following Monday to do exactly the same job as an indirectly engaged 'consultant' paying substantially reduced tax and national insurance.

The Government is going to bring forward legislation to tackle this sort of avoidance. The Inland Revenue will be discussing the practical application of new legislation with interested parties and will work with representative bodies on the production of guidance. The new rules will take effect from April 2000.

Any groups interested in contributing to this process should write to: Elaine Carey Personal Tax Division Inland Revenue New Wing Somerset House LONDON WC2R 1LB

1. The Government is committed to encouraging modern businesses which develop and build on the strengths and commitment of their workforce. The aim of the proposed changes is to ensure that people working in what is, in effect, disguised employment will, in practice, pay the same tax and national insurance as someone employed directly.

2. Businesses employing their workers directly say that they are unable to compete with those encouraging the avoidance at which the new legislation is aimed. As a result, ordinary workers can find they are unable to compete for jobs with those willing to participate in such arrangements. But those who do participate often have to pay a price in terms of loss of protection under employment law. They may find their terms and conditions altered - perhaps losing entitlement to sick pay or maternity leave. They may even lose their jobs without entitlement to notice or redundancy pay. They will usually have no right to any claim for unfair dismissal and may lose their entitlement to social security benefits through a failure to make adequate contributions.

3. The proposed changes are aimed only at engagements with essential characteristics of employment. They should affect only those cases where these characteristics are disguised through use of an intermediary - such as a service company or partnership. There is no intention to redefine the existing boundary between employment and self-employment.

4. Legislation is to be introduced to address the problem with effect from April 2000. However, a primary concern is to minimise any impact of these changes on ordinary businesses not involved in avoidance. To this end, the Inland Revenue will over the next few months be working with representative bodies on aspects of the practical application of the new rules and on the production of guidance.

These changes buttress the new measures to support small and medium sized companies. Without the changes it would be very difficult to target support at genuine entrepreneurial activity - making such measures less effective and more costly.

INLAND REVENUE PRESS OFFICE Enquiries 0171 438 6420

Inland Revenue information is on the Internet at www.inlandrevenue.gov.uk

Send comments by e-mail to poluni.ir.bh@gtnet.gov.uk

Illustrations of how the scheme will work