Last week in the chancellors Pre-Budget Report further measures were announced regarding 'Tackling Managed Service Companies'. The new measures introuced were outlined in the 72 page treasury document 'Tackling Managed Service Companies'
The measures discuss the introduction of new legislation for April 2007 that obligates all Managed Service Companies to pay their workers via the PAYE model, rather than as a combination of salary and dividends. This effectively enforces all these workers to be inside the existing IR35 legislation, and they will pay significant extra tax as a result. The measures specifically do not affect contractors using their own limited company, referred to as Personal Service Companies (PSCs).
For more detail regarding the measures please see last week article Proposed Changes to Managed Service Companies - Explained.
In this article we provide a round up of the market reaction to last weeks news:
David Colom, leading Contractor Accountant [Website]
"Regretfully, their attack will affect those of us who provide quality services to persons who genuinely fall outside IR35."
"The most obvious scenario is therefore that persons who genuinely fall outside IR35, who require a managed/umbrella type service with dividends, will simply be made a director of a one person company, which the accountant operates just as before. Thus, instead of running one company for say 20 individuals, we will have 20 companies, each with one person in it. The Government will have to deal with 20 VAT returns, 20 sets of accounts, 20 tax assessments etc., instead of one - lots more work for civil servants with no extra tax raised."
"The Inland Revenue appear to be going after not just dividends but expense claims, which is likely to put a composite company at a disadvantage to an individual who sets up his own limited company. Obviously we need to see the fine detail of the actual legislation but on the basis of what has been said so far, the days of the composite company providing dividends seem to be numbered. "
"Those workers on lower incomes, referred to in the consultation document, will be hit the hardest, since they do not earn enough to make running their own limited company worthwhile."
David Ramsden, Professional Contractors Group [Website]
"It’s the Chancellor’s prerogative to suggest reforms that remove opportunities for tax avoidance that offer an unfair advantage,” commented PCG’s chairman David Ramsden. “We would agree that workers using composite and other forms of managed service company do gain a tax advantage when compared to 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 seek to plan to reduce their tax bills by legal means."
"“It is crucial that the scope of this measure is defined to include managed service companies but not freelancers and contractors who are genuinely in business,” continued Mr Ramsden. “We would of course not welcome an additional tax burden on the latter group. Our preliminary reading of these proposals suggests that they are sound in this respect.”
Adrian Marlow, Lawspeed [Website]
Speaking to ContractorUK, regarding the exclusion of Personal Service Companies in the legislation.
“This document is absolutely saying genuine personal service companies won’t be treated as an MSC but will still fall within the IR35 tax legislation,” said Adrian Marlowe, managing director of Lawspeed Ltd."
“It’s also saying genuine self-employed people won’t have to pay IR35 as long as they are not working in an employed way.”
Anne Redston, Fellow of the Chartered Institute of Taxation [Website]
Writing for the BBC...
"The chancellor has his sights targeted, possibly as never before, at people looking to avoid tax."
"...the government has become increasingly concerned that significant numbers of individuals are ignoring the IR35 rules. In many cases individuals should have paid the higher tax and NICs required by IR35, but they have not."
"The government has now announced new legislation that deems all those working within these MSC or composite structures to be employees, so they will have to pay the same NICs and tax as employees. However, those who control and manage their own companies have been clearly told that they are not the target: the old IR35 rules will remain in place as before for these 'personal service companies.'"
See full report
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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Charterhouse Group International [Website]
"The consultation document by HM Revenue & Customs regarding “Tackling managed service companies” (MSCs) uses language that is intended to stir emotions in all players within the market – service providers, contractors, recruitment companies and end users. This follows the trend set by HMRC in 1999 when they set out to shake up those who were acting improperly in the marketplace, with the draft Intermediaries legislation, known as IR35."
Today’s document proposes to “Restore a level playing field for those businesses that apply the Intermediaries legislation correctly” and describes how “in the vast majority of cases MSC schemes are not complying with this legislation.”
Commenting on the document, Eugene Lantry, CEO Charterhouse Group International said, “We welcome these changes and were the first to approach the Revenue with regards to creating a level playing field back in 2004. Charterhouse will continue to work with the Revenue and our business partners to ensure the full and continued compliance of our products.”
Published: Monday, December 11, 2006
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