Since last December, when HM Treasury released its attack on managed service and composite companies, contractors have had to begin considering alternatives.
“The clearest cut of these alternatives at the moment is forming your own limited company, but that’s not necessarily the right choice for all freelancers,” says Phil Richards, chief executive officer of Manager Group, a Tamsworth, Staffs-based firm that provides accountancy, payroll, and taxation services.
Time to Review Your Status.
For contractors who use umbrella companies, the time to shop around may have come. “You need to make sure your provider knows what to do, “says David Colom, a principal at DJ Colom & Co., a London-based accounting firm that specialises in computer consultants.
“Whatever your situation, this is clearly the time to at least take stock, and probably to act,” Colom adds.
It seems clear to most observers that composite companies will no longer survive the attack by the Treasury. So contractors working through a composite company arrangement will need to switch into either a limited company - whether one set up by the contractor or one set up by another firm - or a personal service company offered by a provider which is not targeted by the new regulations. “Even if they are deemed to be inside of IR35 they may still being better off as they can capitalise on the 5% tax allowance for business expenses,” Richards points out.
Whatever your situation this is clearly the time to at least take stock and probably to act
David Colom - DJ Colom
Decide What Structure is Right for You.
“Contractors should also be aware that running a limited company by themselves is no picnic,” Richards continues. Indeed, the responsibilities involved in running a limited company - handling accounts, VAT, paperwork—are simply not for everyone. It is also possible to have a provider set up a limited company for you and handle the administration for you while the contractor controls the management of the company.
Contractors should also be aware that running a limited company by themselves is no picnic
Phil Richards - Manager Group
One option should certainly be avoided, as Richards warns.“If you currently work through a managed service or composite structure, and the service provider is planning to convert the structure to a limited company in which the contractor is the sole director and shareholder, there is real danger. The Revenue could well claim that the contractor is not the controlling manager of the company, and will probably act accordingly,” Richards says.
Control is the Issue.
Control of the company is the issue that is being tested severely by the Treasury. Limited companies, or personal service companies, where the contractor behaves like an employee in the judgement of the Treasury, will be subject to penalty. “Nor is it clear,” as Colom says, “how the Treasury will make the determination of what ‘control’ is and how the criteria about control are to be applied.” So it is very important for contractors to make choices about their status: are they inside IR35 or not? Do they want to be subject to PAYE contributions or not, and if not, are they prepared to become real managers of their own affairs? That is effectively the challenge that is being made.
“We won’t know until March exactly what the Treasury definition of ‘control’ will be, “ Colom reminds us, “but we do know that it will be a difficult concept to apply. “
What Colom suggests is that contractors working with umbrella companies of one form or another should find out what their provider intends to do about the rule changes from the Treasury. “It’s not certain that a contractor needs to change provider, but the contractor should make certain that the provider is taking steps to adapt,” Colom adds.
Inside or Outside IR35
One important consideration for contractors is to determine whether or not they are inside IR35. Inside IR35, it may make no sense at all to take on the expense and trouble of a limited company. A contractor at the lower end of the wage scale should probably not even consider it. “Then contractors should talk to a professional about whether or not their expenses would be allowable in any case,” Colom says.
David Colom
Principal
D J Colom & Co Chartered Accountants
David Colom qualified as a Chartered Accountant in the City of London in 1981 and is the founder and principal of D J Colom & Co Chartered Accountants established in 1989.
Started specialising in serving IT contractors in 1993 and is now one of the longest standing suoppliers of accountancy services to computer contractors.
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One final point to be aware of: the Treasury has decided that if a managed services or personal services company becomes insolvent, the Revenue can hold the service provider or agency responsible for the company’s tax debt. This may make agencies of all types more reluctant to work with these kinds of vehicles.
In the meantime we are all waiting until March for more clarification of these issues when the final versions of these regulations are to be adopted.
Published: Tuesday, February 06, 2007
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