The Government will introduce new rules in April 2000 to curb the avoidance of National Insurance by contractors who use limited companies. The delay of a year in introducing the measures is seen as a major concession by the Revenue and may be because they do not wish to cause too much disruption in the run up to the year 2000.

The new rules will use the existing criteria to decide who is employed and who is self employed and in situations "with the characteristics of employment" payments to that individual via a limited company will be made net of PAYE and National Insurance Contributions (NICs) by the agency.

The measures will bring the UK into line with the US and most other European countries. For example, the details of how the United States IRS decides who is an employee and who is an independent contractor are published on the Internet (Document P15A) and summarised here.

Many people have for some time thought it was inevitable that a way would be found to collect NICs from limited companies used in this way. However, using the employment vs self employment rules for this purpose could make the situation much worse from the point of view of the contractor if the process is taken to its logical conclusion. For example if the Revenue deem that an individual is an employee then other tax advantages available such as paying your spouse a salary to use their tax allowance or claiming travelling expenses will also be caught by this measure. Neither of these tax advantages are available to employees.

Taking all this into account there will be no benefit at all to using a limited company and it will be easier to become a permanent employee. The other advantages of using a limited company then disappear such as recovery of VAT from purchases and executive pension schemes.

The effect of this will be that most contractors will return to permanent employment and the flexible IT skills market that has grown up in the last fifteen years will disappear almost overnight, exactly as it did in the United States in the late 1980s. Agencies and accountants who specialise exclusively in the contract market will also disappear leaving only a permanent employment market.

Is this goodbye ?

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