On 6th December 2006 the Treasury published a consultation document
entitled "Tackling Managed Service Companies". The consultation invites
comment on proposed new rules designed to stop certain managed service
scheme providers from avoiding tax payments. The Treasury has invited
Lawspeed to take part, and as can be seen below, we are organising
representation.The foundation to the consultation is that there has been a huge
increase in the number of workers offering services via such managed
service providers, and that the arrangements set up by the providers do
not allow for the correct payment of tax, particularly relating to IR35
and expenses. The consultation document also asserts that workers in
some cases are precluded from achieving employment rights, and are paid
less than the minimum wage. The proposed rules provide
that under defined schemes (referred to as "MSCs"), which appear to
include composite, managed company, partnership and other similar tax
avoidance schemes, all payments made by the scheme to the individual
performing the work shall be regarded as employment income. That income
will then be subject to the usual PAYE and NI deduction rules. Tax
under IR35 rules will not apply to MSCs and so the opportunity to argue
that work, undertaken by someone within a scheme, is outside IR35 will
no longer be available if the new legislation is introduced. The
consultation contemplates imposing penalties on those involved in
operating schemes in breach of the new rules. At the same time Gordon
Brown has announced an increase of HMRC's budget in this area, to £9
million. Of particular concern to stafffing companies is the
suggestion that the Treasury may include provisions making them liable
for the tax debt of an MSC if it can be said that the staffing company
has benefitted in some way from a scheme. Although the full proposal
has not yet been seen, the point is one that most recruiters will wish
to oppose, and Lawspeed is organising representation to oppose this
proposal as it stands. Lawspeed will also assist in putting forward any
other issues which recruiters may consider to be relevant, for example
the impact upon the administration of contracts going forwards,
and comments upon the proposals overall are invited. There
are some serious anomalies within the consultation document, and in
particular the draft legislation, which may require clarification.
However generally the principles appear well thought through and
presented, and most operators within the recruitment industry are
likely to recognise the issues that the consultation and the proposed
legislation seek to address. The style and tone of the
consultation document strongly implies a determination to introduce the
legislation quickly. Consequently agencies that have workers operating
through MSCs may well need to make alternate contractual arrangements
within the next 4 months, given that there is a stated intention to
introduce the legislation in April 2007. As a result of the
proposals there could be a reshaping of the industry. Many workers may
wish to set up their own personal companies if their work is genuinely
outside IR35 rather than rely upon an MSC which will no longer be able
to justify any alleged "outside IR35 solution". Alternatively there may
be a drive to using umbrella companies under which the workers are
employed and paid in full as employees. However there may be a cost
implication as workers, other than those operating through a PSC on
outside IR35 work, will no longer receive the same amount of net
income. This could lead to a drive for higher pay rates at a time when
skill shortages are regularly reported. On the plus side,
as with most market changes affecting recruitment, there are
opportunities to gain market position, particularly for recruiters.
Lawspeed offers advice and solutions in this entire area to those
affected, including MSCs and umbrella companies, agencies/consultancies
and contractors. As indicated above, we shall be making
representations within the consultation and if you wish to take
part please contact us. We are due to meet with the Treasury on
17th January 2007. For more information call Lawspeed on 01273 236236. Please click here to put forward your point of view.
Lawspeed will also be holding a seminar in London on this issue once
the final legislation is to hand. Details of this will be
published shortly. To register in advance on a no obligation basis click here and insert "register for MSC seminar". To be kept up to date with this and other current issues which have an effect on your company and industry register for Agencyzone, Lawspeed’s free newsletter service. DOWNLOAD THE CONSULTATION DOCUMENTS: 1. Latest Download 23/03/07 - Chapter 9 ITEPA - Meaning of "Managed Service Company"
– Download the Document
2. Summary of Consultation Responses
– Download the Document
3. Tackling Managed Service Companies
– Download the Consultation
4. Transfer of MSC Debts
– Download the Consultation
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