The UK government has made concessions to proposed legislation aimed at stopping people hiring themselves out through their own companies to avoid tax.

As revealed by BBC News Online two months ago, the original proposals - announced by the chancellor in the March Budget - prompted outrage because they were seen as an attack on the enterprise culture of the information technology industry.

Inland Revenue: likely to have much discretion over how to apply the scheme

If they had been introduced, anyone in a partnership or a personal service company - for example, a computer software programmer who sets up a company through which to market his services - could have had tax and National Insurance deducted from their fees by the client as if they were the client's employees.

There were claims that the measures would do immense harm to thousands of small businesses and a lobbying body, the Professional Contractors Group, was set up to oppose the plans.

There were also representations from leading firms of accountants and business organisations such as the Federation of Small Businesses.

The government has taken note of the protests and amended its proposals significantly.

The main changes are:

• The client no longer has to decide whether the services fall within the government scheme - this will be between the service provider and the Inland Revenue

• There will no longer be a special "control test" for such services - existing rules on the boundary between employment and self-employment will apply

• Tough rules on allowable expenses have been relaxed

Maurice Parry-Wingfield, tax partner with accountants Deloitte & Touche, says: "These changes have reduced the impact of the problems enormously. There are some loose ends to be tied up but they are less of a worry."

He described the first and second changes as "major breakthroughs" and said a huge burden of compliance had been lifted from business in general.

Guidance notes

The revised proposals will be included in draft form in the Finance Bill to be debated in Parliament in the New Year and, if passed, will be effective from 6 April 2000.

There will be an opportunity for professional bodies to offer their views during this time, but no guarantee that they will be taken into account.

Mr Parry-Wingfield says: "There is a suggestion that the Inland Revenue will produce guidance notes for personal service companies to clarify how the new rules will work in practice."

But it seems likely that the Inland Revenue will have a lot of discretion over how to apply the scheme.

One problem that remains is the definition of who will come under the scheme and who will be treated as self-employed. Mr Parry-Wingfield says: "We need workable and sensible rules about who is and who isn't a personal service company."

"Sham"

The Professional Contractors Group was unimpressed by the new proposals, accusing the government of paying lip-service to genuine consultation. It said the scheme would still tip the balance in favour of large US companies at the cost of small British enterprises.

Andy White, chairman of the group, said: "Inviting people to sit around a table and then tell them what the Inland Revenue intends to do regardless of their opinions is not genuine consultation by anyone's standards.

"The process has been a sham. There have been poor proposals, ignored letters, false promises and Gordon Brown and Dawn Primarolo [the Paymaster General] have repeatedly ignored the people who will be affected by this.

"Now they have replaced the unworkable with the illogical."