Legal Business Blogs

Budget 2016: Contract lawyer services avoid tax crackdown

City law firms using contract lawyers can breathe a sigh of relief, after Chancellor of the Exchequer George Osborne (pictured) said in his Budget today (March 16) that the government would not target the private sector in its crackdown on tax savings made by consultants through personal service companies (PSC).

There were concerns the changes, proposed last November, could have had negative implications for contract lawyer services such as Addleshaw Goddard’s Integrate, Pinsent Masons’ Vario, Eversheds’ Agile and Allen & Overy’s Peerpoint, as well as BLP’s Lawyers On Demand. Contract lawyers often set up as PSCs, as this means limited employee obligations are placed on the contracting business and it is in the financial interests of the consultants.

But Osborne announced the crackdown to ensure organisations were paying the correct tax rather than giving a tax advantage to those contracting their work to PSCs would be limited to the public sector.

Eversheds tax partner Ben Jones said critics objected to the crackdown because it was against the general policy of reducing administration for business from a tax perspective.

He said: ‘The objection was that by effectively deeming the business who’s contracting the person to be the employer every time, you quite dramatically increase the administrative burden associated with dealing with people on a contractor basis.’

Jones said the government has effectively decided to take a harder line on the public sector.

‘I suspect the government’s view is that they already have an evolving and sophisticated tax system around personal service companies generally. It sounds like a compromise effectively, [the government’s] saying the push back from business generally was too great, but we as the public sector are a large employer ourselves so we can change the rules for ourselves.’

In its effort to reach its targeted £12bn revenue by 2020 from changes targeting tax avoidance measures, the government has imposed a range of what Jones described as ‘fairly niche measures’ including a cap on interest deductions for debt at a rate of 30% of UK earnings, changes to stamp duties for non-residential properties, measures to restrict the use of corporate losses for both banks and training businesses, tackling of disguised remuneration and measures to tackle offshore property developers.