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There is no doubt 2010 will go down in history as a year that many IT contractors in the UK will want to forget. Many contractors are about to be faced with the real possibility of having to pay massive tax bills because they utilised offshore payroll solutions that have been deemed to be illegal. Perhaps most perplexing in this case is that originally these schemes seem to have been fine and it was only amended legislation in 2008 (which has been backdated) which has caused the issue.

The backdating of this legislation has prompted a response of a group of contractors challenging the legality of the HMRC BN66 decision. Having just been ruled against it has left the futures of many more contractors up in the air. As well as the contractors it will also no doubt have an effect on the offshore companies that have been offering these types of solution and their employees.

Contracting amongst IT professionals is only becoming more popular. Contracting is all about picking your own technical challenges as well as the freedom of being your own boss. Greater pay, more freedom, a greater chance to push yourself technically? The only thing holding back more IT workers is the payroll problems. It is with this in mind that many go in search of suitable payroll solutions.

IT contractors have always been keen to source a solution that pays them the most. A lot of these schemes which started out being utlisised by property developers became very popular with the IT contracting crowd. To meet this demand many IT contractor payroll solutions have sprung up over the years. One thing is certain though and that is most IT contractors seem to prefer the option of having somebody else manage their payroll for them as opposed to forming their own limited company.

The solution that has caused the latest problem with HMRC was based on an offshore partnership model. An arrangement was made that took advantage of a double taxation treaty between the Isle of Man and the UK. When this flaw was closed these schemes closed down but then HMRC backdated the changes causing a lot of contractors who thought they were acting within the law facing huge tax bills.

One alternative solution was the EBT – Employee Benefit Trust. The problem is these have been investigated heavily by HMRC and many contractors have been left unsure as to the legality of the EBT. Of course this will not have been helped by the latest ruling on BN66. Whilst some people are more than happy to carry on using EBT style solutions a lot more will not use them.

The final result is that IT contractors really do need to make sure their chosen payroll scheme is compliant. There are still a number of providers out there who are running completely compliant tax efficient payroll solutions, you just have to know where to find them. The benefits for IT professionals who can go down the contracting option in a tax efficient manner can be enormous.

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