New legislation and how it affects Interims
For all those contract workers utilizing a wide variety of umbrella and composite companies - there has been a rude awakening! Chancellor, Gordon Brown’s pre-Budget speech in December 2006 unveiled new proposals to remove the tax advantages that composite and managed service companies can offer their clients.
The basic stance he took is that workers using these schemes do gain a tax advantage over contractors and freelancers who start up and trade using their own limited company structure, where they are normally the registered director.
From the 6th April 2007, the Government plan to take action to tackle Managed Service Companies (MSC) schemes which are used to avoid paying the same tax and National Insurance as employed people under the PAYE system.
Income received by those using MSCs and composites in relation to services provided through the MSC or composite will be subject to the same levels of tax and national insurance as those under PAYE. The MSC and composite would be obliged to operate Pay As You Earn (PAYE) and deduct full tax and Class 1 NICs on that income - the rules for tax relief for travel expenses would be treated the same as for other employed workers under PAYE (via P11d submission).
Anyone currently going through one of these schemes particularly a composite structure is likely to suffer a serious pay cut from April as home to work travel and subsistence payments and/or dividends will no longer feature as part of their pay. Respectively, there will be no corporation tax and no advantages.
It doesn’t stop there! From the 6th April 2007, the Government also proposed to address the problem of MSCs and composites escaping payment of tax and national insurance due by allowing the recovery of these debts from appropriate third parties
The proposals are currently in draft legislation and it remains to be seen whether this legislation will go through. We believe that the government will struggle to define a ‘managed serviced company’ to ensure that MSC and Composite schemes are targeted by the government accurately. They have already hinted the trouble it faces in a document published headed "Tackling Managed Services Companies"
A large percentage of the document is dedicated to determining exactly what a managed service company looks like. If ever there was fodder for lawyers, this is it !!! Even if lawyers and the government can agree on what a managed service company looks like, for the legislation to work it still has to be proved that workers are "disguised employees," which is exactly where IR35 fell apart.
In The Times newspaper dated 14th March it claims the unpopular MSC debt transfer rules - dictating ‘third parties’ may be liable for employment taxes - face a delay of up to six months from April 6. The article went on to say that delaying by up to six months the date from which the Revenue will enforce third party rules would allow employers more time to ascertain contractors’ tax status. So maybe the loud chorus of voices within the industry urging the government to defer the new regulations for Managed Service Companies (MSCs) has got through to officials at HM Treasury.
Futurelink, a 12 year established payroll service specializing in tax efficient payroll solutions, are one of the companies that have been given the all-clear by their tax advisors. Having never followed the typical MSC route with minimum wage and dividend, they have tended to provide more stable, recognised solutions; Single Owner Limited companies and Employment solutions. Although there are further details to be clarified in the upcoming budget, Futurelink will continue to provide payroll services, where the contract worker can keep up to 91% in hand!
