Any hopes IT contractors may have had of the Chancellor repealing the controversial IR35 tax legislation were dashed yesterday.

The tax demands small companies treat all turnover as salary. The high proportion of contractors in the IT and financial services sectors means means IR35 legislation particularly affects them.

A judicial review of the IR35 legislation in the High Court will begin on 13 March. It's likely to last three days.

“These rules mean companies cannot reinvest their profits,” said Susie Hughes, a spokesperson for PCG (Professional Contractors Group). The PCG, a non-political group set up to protect the rights of contractors, was founded in 1999 to lobby against IR35, which became law last April.

The group claims such rules have a serious detrimental effect on small companies and freelancers, and that it runs contrary to EC law. Freelancers are treated as ‘disguised employees’ for tax and National Insurance purposes.

“The government has demonstrated completely that it is no friend of small businesses or high technology,” said PCG chairman Gareth Williams.

More positively, the budget included tax breaks for software and database creation and other intellectual property rights.

Law firm Taylor Joynson Garrett found that intangible assets such as company stocks and shares, and other non-physical property, account for more than 20 percent of the value of UK high-technology companies.

These tax reductions are intended to increase local software development. According to the Computer Software and Services Association said any moves that encourage home productivity are beneficial to the IT sector.

But the CSSA is not completely satisfied with the budget. It is trying to get National Insurance charges on unapproved share options (common to internet start-ups) dropped.