Tackling Managed Service Companies

Why this has come about

In the “Tackling Managed Service Companies” document the government admits that IR35 is not working as intended and that the rules are being flouted by composite companies, who are aggravating the government further by offering advertised promises of “IR35 proof contracts” and IR35 Insurance”. HMC says these providers entice workers that would otherwise not use these schemes by giving them a false sense of security.

The document claims that the increasing use of composites is resulting in an unfair market where composite users and promoters are gaining an unfair advantage. They also accuse composites and their promoters (including some agencies who introduce composites) of “denying employment rights to the worker”.

An estimated £1.05 billion in additional tax revenue is expected over the next 3 years.

Who is affected

- RED (caught)
Composite companies paying dividends, both the single member and multiple member schemes are included.
Limited Liability Partnerships (recently an increase in the emergence of this type of service has been noted by HMRC)
Associates of managed schemes i.e. Even if the money is routed and paid to the worker via third or fourth parties the rules will apply.

- GREEN (unaffected)
Individual Personal Service Companies (PSCs)
The traditional one-man limited company’s who will continue to operate the current IR35 assessments, apart from some slight changes to the company’s P35 which are designed to highlight those who may be trying to illegally avoid IR35.
PAYE Umbrella Companies
Treasury has confirmed to 3Sixty that PAYE Umbrella company models such as our Hyperlink Oxygen 360 solution are unaffected by the new rules and legislation.

How the rules apply

The new rules clearly define a managed service provider as :

• Directly or Indirectly involved in supplying workers to other parties and
• Where more than 50% of the income generated by the worker is paid to the worker and
• Where the worker has no control of the company bank account or management of the service

From 6th April 2007 all payments to the worker from these structures will be subject to full tax and National Insurance (both employers & employees) as per current PAYE regulations. This effectively render the composite useless as they will no longer be able to use the current tax reductions through dividend payments and other such tax avoidance schemes.

Additionally if a debt arises from unpaid taxes which the government cannot reclaim from the worker of the scheme provider they are considering the introduction of chain laws (like those in Holland) to allow them to reclaim the debts from other parties such as the director of the managed service, the agency and even the end-client.

Guidelines to protect agencies and end-clients:

• Don’t refer contractors to composite companies
• Review your supply chain to identify composites
• Ensure all composites are out of your supply chain before 6th April 2007 (otherwise you may be liable for PAYE after that date)
• Give contractors options, don’t be seen to “force incorporation“ on workers or "deny them employment rights". A compliant PAYE umbrella offers full employment rights.
• Don’t be seen to be an associate of a composite company

What this means for recruiters

There are only a few options left open to contractors :

• Use their own Limited company where they control the company bank account
• Use a PAYE Umbrella service
• Use an in-house agency PAYE (this is less favoured as you will then have the burden of employment liability)

It is likely that your current PSL’s of managed service providers will need to be examined to remove any schemes affected by the new rules. The Treasury have suggested in the document that where agencies are putting workers in to Managed Services without further option they are “denying employment rights to the worker” and in some cases, the agencies have set up their own Managed Service provider. However we believe this could be easily confused where an agency has established a close association with a sole Managed service provider.

Remember the government consider the dividend paying composite company to be public enemy number one and will not stop until they are closed. They have, however stated that they are not targeting legitimate PAYE umbhttp://www.parliament.uk/directories/hciolists/alcm.cfmrella companies, one-man limited companies, you or your contractors.

Make your representations regarding debt transfer to agencies and end clients to:

msc.consultation@hm-treasury.gov.uk

John Wrathmell
MSC Consultation
HM Treasury
Room 2/N2
1 Horse Guards Road
London
SW1A 2HQ

In the 16 weeks between now and 6th April 2007 everyone has an opportunity to put their houses in order, but after that there will be no mercy shown by the new legislation. Leaving preparation until the start of April is likely to cause unacceptable levels of administration as thousands of contractors all try to change their limited company before the rules come in. As a result several agencies have said they will need to implement a change process staring in the New Year.