PBR: Managed service companies – first in the firing line! By Rebecca Benneyworth

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There was a clear indication in the Budget 2006 publications that tax motivated incorporation was still an issue for Government. The Red Book included an analysis of the issue at paragraph 5. 85 and indicated that steps would first be taken against managed service companies :

5.85 Since the Pre-Budget Report, further evidence has emerged that employment income is being disguised as dividends in order to take advantage of the small companies tax rate, often encouraged by promoters of mass-marketed managed service company schemes. There is also evidence of some agencies, contractors and employers requiring workers to use corporate structures, thereby denying them employment rights as well as avoiding paying their fair share of tax and NICs.

5.86 The Government believes that all i...

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11th Dec 2006 17:30

Umberella
would this legislation cover umberella companies

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By Anonymous
11th Dec 2006 17:42

IR35 lives?
Rebecca -

Although IR35 is still with us, in recent months it has had the appearance of a toothless old moth-eaten lion (or should that be paper tiger?)

In view of Muscat v Cable & Wireless (and some IR35 cases that HMRC have lost), do you think they have now given up as a bad job their attack on individual one man band service companies to have a go instead at umbrella/composite companies?

Or is IR35 a snarling leopard prowling through the undergrowth just waiting for an opportunity to pounce again on unsuspecting contractors?

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07th Dec 2006 12:20

Unforeseen consequences
An MSC can currently be used by someone who for regulatory reasons must trade through a Ltd Co, but:
a) wishes to outsource the admin and all payments & dealings with HMRC, Companies House
or
b) cannot legally do so (e.g. due to disqualification)

If MSCs are rendered obsolete by new legislation:
In case a), there will now be a class of people coerced into sorting out for themselves what was formerly done correctly and transparently by the MSCs, potentially giving rise to shortfalls or at least mistakes in tax payments and filings.

In case b), there does not seem to be a good alternative, unless a family member sets up as a mini-agency Ltd Co and employs the person.

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By NeilW
07th Dec 2006 15:56

Too complex
I notice that a note to the PBR explanation states that 'employment for tax purposes is not necessarily the same as for employment law purposes'.

The question has to be 'why'?

Surely the simplest solution here is to eliminate the agency legislation and intermediaries legislation and replace the lot with a simple rule that no amount of structure between a master and a servant will prevent a master servant relationship arising if the facts point to that, nor will it prevent the master from being ultimately responsible for the employment taxes and operation of the social security benefits for a servant. (ie a simple 'duck' test for employment - disregarding all other structures).

Add this to another simple rule that states that an indemnity for employment taxes and benefits on either a servant or any entity associated with a servant is unenforceable.

Contract law indemnities then take care of the rest of the chain if the client so insists.

Why wouldn't this work? Client either makes the relationship non-employment (avoiding the entire issue), or the contract chain is responsible from top to bottom for the employment taxes. HMRC goes after the biggest fish and leaves contract law to sort out the rest of the responsibilities.

Isn't it time to deal with the problem, rather than messing around patching up the symptoms?

NeilW

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07th Dec 2006 23:37

Non-employment
"Client either makes the relationship non-employment (avoiding the entire issue), "

But the point is that the proposals want to take out all MSCs regardless of whether there is 'disguised employment'.

The MSCs in my experience go to great lengths to undertake IR35 compliance reviews of the contracts and relationships, and hence should not be affected by legislation if it was looking for pseudo-employment.

But it appears that MSCs of any nature are now being targetted as a bad thing in their own right. This has all the indicators of another IR35 fiasco, but one which will grind on ultimately benefitting no-one.

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15th Dec 2006 11:35

Non-"evading" users
"If the advantage of MSC is effectively nullified ..."

The advantage of an MSC is purely that of outsourcing administration, for pukka users.

The proposals will effectively place an extra tax on those wishing to do that, or drive them to self-incorporate with all the attendant scope for mistakes.

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