New draft legislation proposed by HMRC to clamp down on tax avoidance through false self-employment will not be applicable to limited company contractors.

According to Lawspeed – an employment law firm based in Hove – this immunity is caused by a deliberate tax technicality introduced by HMRC.

Dave Chaplin, CEO of ContractorCalculator, said:

“The new legislation is designed to target companies offering mass-marketed schemes, where an employed workforce has been converted into a self-employed sole trader workforce overnight specifically to avoid 13.8% employers National Insurance Contributions and holiday payments.”

This kind of scheme is not possible for limited company contractors, because of the way they are paid through a combination of salary and dividends, rather than through the agency.

Despite this technicality, Lawspeed also confirmed that IR35 would not be affected in any way and would continue to apply to limited company contractors as before.

The position for other kinds of freelancers remains unclear, leading to some serious concerns in the sector.

Andy Chamberlain, senior public affairs advisor for freelancers’ union, PCG, said:

“We interpret it as a dangerous proposal which could disrupt the way freelancers engage with clients through agencies.”

The legislation is undergoing a consultation which ends on 4 February 2014.