The Treasury has sought to compromise on a key plank of proposed measures in the Budget on March 21 to tighten income tax laws for contractors and freelancers.

It is understood that Gordon Brown has heard submissions from the financial and support services industries protesting that the proposed law could render “third parties” liable for contractors’ tax debts.

The legislation, unveiled in draft form last month, is meant to discourage use of “managed service companies”, a device to minimise tax. The laws permit Revenue & Customs from April 6 to recover from agencies or “end-point” employers any unpaid income tax where a freelancer or contractor uses a managed service company.

Managed service companies attract a lower rate of tax and are excluded from the requirement to pay national insurance.

The Times has learnt that the Treasury is looking to delay by up to six months the date from which the Revenue will enforce “third party” rules. This would give employers more time to ascertain contractors’ tax status.

Although the legislation is expected to stick to the Government’s policy of cracking down on freelancers who do not pay tax, it is understood that it will reflect a “pragmatic” approach.

The Association of Technology Staffing Companies told the Chancellor that the laws were “grossly unfair” and would cost the recruitment industry “millions of pounds”.

A submission by the accounting firm Ernst & Young (E&Y) proposes a delay in the start by six months from April 6 to October 6.

Chris Sanger, E&Y’s director of tax policy, said that the proposed rules on third parties were currently “an impractical solution that places [companies] in an impossible position”. It was hard for employers to tell a managed service company from other tax structures, he said.

However, the Treasury believes that many firms are aware that workers are using managed service companies and encourage the schemes.

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