The construction industry will be familiar with the new CIS scheme, which tackles this. IT contractors and other knowledge-based workers have had to contend with a similar initiative, known as IR35, since 1999. The latest move on managed service companies attacks 'composites' and similar arrangements, which will be familiar to some in the construction industry as a means of operating their small businesses.

Hardhatter's sister site, Shout99 and Actinium, which offers services and solutions for the higher earning contractors, have compiled a set of Frequently Asked Questions (FAQs) relating to the changes to MSCs.

Q1. When does the new proposed legislation come into effect?
A1. It comes into effect for all payments you receive after April 6 2007, regardless of when the work was actually carried out.

Q2. What is a Managed Service Company (MSC)?
A2. The Government sees this as an artificial corporate structure which mitigates tax for individuals. Their definition is: An MSC is a form of intermediary company through which workers provide their services to end clients. In the draft legislation ‘MSC’ includes both ‘composites’ and ‘managed personal service companies’.

Initially there was some debate as to whether or not umbrella companies were included or not. Indications from the Treasury appear to suggest that they will not be covered by these provisions.

The Government has been clear that ‘Personal Service Companies’ are not targeted by this.

Q3. What is a ‘Personal Service Company’ (PSC)?
A3. It’s the same as your own limited company. The Government has said that a worker in an MSC is almost invariably not in business for himself and does not have financial or management control of the company – unlike a PSC where the worker is usually a director and controls the finances of company and how it operates.

Q4. What does it mean?
A4. The Government is setting aside the usual rules for determining if you are in business and saying that anyone who operates through a Managed Service Company and is effectively an 'employee' for tax purposes.

Q5. When will we see the final legislation?
A5. No one knows exactly but will probably be before the end of April – possibly after it has come into effect.

Q6. What are my options now?
A6. That actually depends on the final legislation. As the proposals stand currently your options are: PAYE through a service provider, umbrella or PSC. Technically PAYE through a service provider and umbrella give the same return if operated compliantly.

Q7. What action do I need to take and by when?
A7. That depends on how you currently operate and your billing frequency. If you working through an MSC, then you need to move very quickly, possibly towards your own PSC. Check with your provider what their plans are post-April 6.

Q8. I am new to contracting what should I do?
A8. If you have a short contract and unsure if your future lies in contracting then using an umbrella PAYE solution, could be a suitable vehicle. The cost of closing a new PSC could be a limiting factor.

If you are certain that you see contracting as a long term option PSC is your option, subject to previous FAQ’s being considered.

Q9. How does this fit with the new CIS?
A9. This is an area which is still open to debate. Some experts believe there needs to be further clarification on this point.

Q10. I am currently with a composite - am I affected?
A10. Yes. Depending on your personal circumstances will depend on how long you have left to make the changes for the New World without it affecting your income.

Q11. I claim high levels of non receipted expenses will this still be allowed?
A11. Possibly, possibly not. HMRC could argue if you are in a PAYE or umbrella solution then each place of work could be, in their view, your permanent place of work. On this basis travel and subsistence would not be allowed. If umbrellas remain outside the scope of the legislation, and therefore have no risk of debts being transferred, some of them will probably continue with allowing these expenses. However, it remains the case that all expenses must be genuine and incurred in the course of your business. The dispensation for unreceipted expenses is for the umbrellas own records – not the contractor or sub-contractor.

Q12. How difficult is it to set up and register my own company?
A12. Not particularly difficult. There are many places that are able to set up companies for you. You should be aware that there is a very high number of new companies being established currently and so there could be some delays.

Q13. How do I know my PSC is compliant?
A13. Technically you don’t, as final legislation has not yet been published. Hardhatter will be continuing to report developments on this

Q14. What is the main “Grey” area?
A14. Probably how the word “control” will be defined, as you need to demonstrate you have financial and management control over your business. HMRC has stated that they will be looking for case law to determine this definition. However, anything short of it being your own PSC with you as sole director, shareholder and bank signatory could well be challenged.

Q15. When will HMRC be able to give guidance on compliance?
A15. Probably not before Royal Assent has been granted, usually end July or August.

Q16. What are the likely factors in operating my PSC compliantly?
A16. Sole director, sole signature on bank – no proxy or third party agreements, contract direct with agency, invoices to agency and money directly to your PSC bank. A PSC is, in old speak, your own limited company.

Q17. As well as being a director of my PSC should I also be an employee?
A17. Being a director and not an employee means that there are no minimum wage requirements on you. Becoming an employee brings the minimum wage into play, as well as requiring an employment contract. It can be argued that being an employee helps with the IR35 status.

Hardhatter will keep these FAQs up-to-date as new information relating to the MSC situation emerges. If you have any general areas you would like to see addressed here, please post your question below. These FAQs are for general guidance purposes only and cannot be seen as recommendations as to how you should operate. If in doubt, contact a specialist adviser.

Further information
For more information about the Pre Budget Report, the MSC proposals and its effects on freelancers, see the 'Political News' section on Hardhatter's sister site, Shout99. The Budget is scheduled for Wednesday, March 21 - Hardhatter will be providing comprehensive coverage of the developments relating to freelancers and small businesses on the day - and subsequent reactions from experts.

--
If you wish to comment on this article, please log in and use the Reply button below. Registering is free and easy.
-
Susie Hughes
The Editor © Hardhatter 2007