Government tax clampdown threatens contract lawyer market

The Government is considering closing a tax loophole aimed at reducing tax avoidance by consultants, a move that could have a significant impact on the growing contract lawyer market.

The move focuses on the issue of so-called “disguised employment”, in which people working for one organisation for long periods are taxed at beneficial consultants rates.

In particular the Government is examining the use of controversial ‘personal service companies’ (PSCs), by which professionals in a range of industries set up a company to reduce their tax rate to about 20 per cent.

There are now indications the Chancellor George Osborne could announce changes in his autumn statement on 25 November, with plans that would shift the tax burden on to employers and may raise up to £400m a year.

It is thought that these changes would see any consultant using a PSC move onto a company’s payroll after a month.

Over the summer the Government announced that HMRC would begin the process of looking how to improve the effectiveness of the existing intermediaries legislation, commonly known as IR35.

A consultation paper, which used the legal market example to illustrate the differences in tax payable, also clearly signaled that HMRC was aware the contract lawyer market was a growing segment of the legal industry.

“A legal company hires two lawyers in 2015/16 who do the same job and work on the same cases,” it said. “The company pays the lawyers gross payments of £70,000 per year.

“Jo works as a direct employee. The company deducts income tax and employee NICs from her salary and pays employer NICs on top. The total tax and NICs paid on Jo’s salary is £30,612 (£22,071 by Jo and £8,541 by the company).

“Ben works through a PSC and does not operate IR35. He pays himself the most tax advantageous remuneration strategy combining a low salary and dividends. His total tax and NICs liability is £16,900.”

The UK market has seen a significant number of contract or flexible-working initiatives launch in recent years including Addleshaw Goddard’s Integrate, Allen & Overy’s Peerpoint, Eversheds’ Agile, and Pinsent MasonsVario.

The most recent was announced yesterday, with DLA Piper confirming it will offer its clients a flexible resourcing capability through a bespoke agreement with agile working provider LOD.