Brian GormanFirms such as Gabem, Brookson and Charterhouse had their worst fears confirmed in Chancellor Gordon Brown's Pre-Budget Statement last week, which promised a crackdown on certain tax advantages for composite companies.

Composite companies are limited companies whose structure allows several independent contractors, often working through recruitment agencies, to become employees and shareholders of that composite company. These contractors can receive some of their payments as dividends, rather than wages, saving on tax and National Insurance Contributions (NICs).

However, the scheme has proved controversial and the chancellor previously warned that some schemes were essentially "disguised employment". In July, Gabem lost its CIS5 certificate, which had saved tax for many of its contractors in the construction sector.

The chancellor warned that the government "remained concerned about the tax-motivated incorporation of the self-employed". Existing intermediaries legislation, known as IR35, is designed to ensure that the correct tax and NIC treatment is applied.

"But these rules, are, in many cases, not being followed by [composite companies]," said the chancellor. "This gives them an unfair advantage over compliant businesses and workers".

David Ramsden, chairman of the Professional Contractors' Group, said: "We would agree that workers using composite and other forms of managed service company do gain a tax advantage compared with contractors who take on the full responsibilities of being in business, such as by using bona fide limited companies. However, it's legitimate that contractors should plan to reduce their tax bills by legal means."

The government's consultation period on the proposals runs until 2 March. Martin Hesketh, managing director at Brookson, said: "We will continue to engage extensively with the government during this consultation period to ensure that the rights of our members are adequately protected."

Charterhouse, which held a seminar for its agency recruitment clients last week to explain the proposals, said it was in discussions with the Inland Revenue.

Adrian Marlowe, of LawSpeed, said: "If [firms that set up composite companies] were on the stock exchange, their share price would be going through the floor now."

Freelancing and contracting in themselves will not be affected by the proposals. Personal service companies (PSCs) will not be within the scope of the measures. Tax expert Anne Redston told the seminar that with PSCs, unlike composite companies, individuals control certain things in the company, such as the bank account. "You would have to demonstrate control in practice, not just the right to control," she said.

The government said it also aims to protect workers' employment rights. By going through agencies and composite companies, a contractor is less likely to be regarded as an employee.

The Pre-Budget Statement also set out measures to tackle skills shortages. This included acceptance of the recommendations of the Leitch report, which will put pressure on employers to boost training programmes.

Marcia Roberts, chief executive of the Recruitment and Employment Confederation (REC), said: "Skills shortages are one of the major challenges for UK recruiters and employers. Recruiters are confronted on a daily basis with the mismatches that exist between what job-seekers have to offer and what employers want. There is a need for urgent action to address these resourcing challenges."