Pre-Budget paper raises possibility of further tax increases for IT contractors

A discussion paper titled ëSmall companies, the self-employed and the tax systemí published as part of the Chancellorís pre-Budget announcement raises the possibility of further tax increases for contractors warns giant group plc, the contractor specialist.

In the paper the Government invites comments on whether it should ëÖconsider segmenting owner-managers of companies from other company owners for tax purposesÖí

Matthew Brown, Managing Director, giant group, comments: This sounds very ominous. Owner-managers of companies are already differentiated from other company owners for tax purposes by IR35 and the application of Section 660, so itís a little perplexing as to what the Government is getting at.

The suggestion appears to be that further tax differentiation between owner-managed companies and other companies is necessary, which raises the possibility of something along the lines of NIC on closed company dividends.

According to giant, this would complete a spectacular U-turn for the Chancellor after he personally encouraged the growth of owner-managed limited company structures by introducing the nil rate corporation tax band in 2002.

Taxñmotivated incorporation

Under the heading ëTax-motivated incorporationí the discussion paper also refers to the introduction of the 19 % minimum rate of corporation tax during Budget 2004, stating: ëÖThe Government will continue to monitor this area to ensure that its objectives for the tax system continue to be metÖí

This, says giant, implies that the corporation tax rate may be subject to further change at a future date, as early as the 2005 Budget.

Explains Matthew Brown: One of the Governmentís objectives for the tax system is to maximise the amount of tax it receives. Corporation tax receipts from multinationals have not boosted the Chancellorís income in the way he hoped so he may be tempted to go for the easy target and hit small companies again.