Tax Disputes & Investigations
Employer Specialist Services IR35 – Managed Service Companies
IR35 Intermediaries Legislation – Managed Service Companies (MSCs)In the 1990s, many professionals and consultants (particularly in the emerging IT market) incorporated their micro-businesses rather than work as employees. In part, this was driven by large organisations wanting to utilise more flexible labour without the associated costs (such as holiday pay or employer National Insurance). However, contractors (and certain advisers) realised that opportunities existed via incorporation to reduce their potential tax liability. Typically, these companies would pay their owner (and Director) a minimal salary at the NIC threshold (so as to ensure an up-to-date NIC account) and then distribute profits to them by way of a dividend thereby only paying a maximum effective tax rate of 25% (and no further NIC). Many contractors saw no real change in their work or terms and conditions and in some cases the only change was that on a Friday they had been an employee and on a Monday began working through their own personal service company. HM Revenue & Customs (HMRC) (then the Inland Revenue) became increasingly concerned and, with effect from 6 April 1999, introduced the IR35 provisions to counter what it argued was "disguised employment" (i.e. that the contractor would have remained an employee (tax under PAYE) if it had not been for the introduction of the company). IR35 The IR35 test applies whenever an individual provides his/her services to another party via a limited company or partnership (including a Limited Liability Partnership). The test requires that both the contractual relationship and the actual terms and conditions in place between the parties are examined to determine whether or not employment would have existed were it not for the personal service company. Many of the considerations under IR35 are similar to those used to determine the correct employment status of an individual worker. Many contractors will use an agency to source work and there will often be contracts in place between the agency and the personal service company (the "lower" contract) and the agency and the end client (the "upper" contract). These can often be contradictory and contractors must ensure that they have sight of both contracts to ensure proper compliance with IR35. If a contract is caught by IR35 then special rules dictate that PAYE/NIC must be applied (retrospectively if need be) regardless of any dividends that may have been paid. The business must calculate PAYE on the total income received under the contract less a flat 5% deduction for running costs, any pension contributions made, any expenses allowable for tax relief purposes, any capital allowances claimable and any amounts already subject to PAYE. This is the "deemed payment calculation". Example
Amount subject to PAYE and Employee NIC £ 56,649 IR35 issues are regularly being argued and litigated, which means that technical guidance and opinion on the subject is constantly evolving. This is a complex area of tax law where specialist advice is essential. Managed Service Companies Many contractors do not wish (or are unable) to deal with the day-to-day requirements of running their own company. Managed Service Companies ("MSCs") (or "umbrella companies") typically involve the contractor being a shareholder of the company, but he/she will not be a Director or control the company. These duties will be undertaken by the person or organisation responsible for setting up the company, often known as a "provider". MSC arrangements have been widely marketed to the contracting community. They use a variety of means to minimise the effective tax rate paid by the contractor. Unsurprisingly, HMRC has been concerned for some time about these arrangements, particularly as where such an arrangement was deemed to have "failed", there was no effective means of collecting any tax found to be due. In 2006, HMRC introduced special rules to try to counter the use of these companies. The Managed Service Company rules attempt to define an MSC in law. If a company is caught by the MSC rules, it must operate PAYE/NIC on all monies (similar to the IR35 "deemed payment" calculation above). Accompanying the rules was legislation allowing any tax debts of an MSC (which were irrecoverable from the company) to be transferred to another relevant party. Typically, these would be the Directors of the MSC, the provider, the contractor or the end user client. Many MSCs operate offshore (i.e. outside the jurisdiction of HMRC) and so the UK contractor or the end user client are most likely to be targeted for payment of tax. How can OneE TDI help? OneE TDI does not offer MSCs to its clients. Instead, we help our clients identify such arrangements and advise them on the risks associated with them entering into business with such organisations. This helps our clients to protect themselves against the real threat of tax debts possibly being transferred to them. In addition, we offer alternative solutions to contractors. At the core of OneE TDI is a highly experienced team specialising in all areas of tax disputes and investigations work. We offer confidential, non-judgemental advice to best defend our clients and have a proven track record in successfully managing all contentious tax matters. We have successfully defended numerous businesses challenged by HMRC under IR35/MSCs and ensured that any enquiry or dispute with HMRC was resolved quickly, fairly and with little disruption to the business itself. We also proactively assist clients in the planning and review of contracts, terms and conditions, working relationships and other relevant factors. We provide a comprehensive service to accountancy and legal practitioners and their clients. Our advice saves our clients time and money and helps reduce their potential exposure to tax, interest and penalties. Please see the Testimonials kindly provided by our clients (or their accountants or lawyers), which confirm our levels of client service. Whilst we endeavour to provide informative and accurate information, the content on this site is for general information purposes only and should not be taken to constitute tax or legal advice which must always be tailored to individual circumstances. Please contact us if you would like to discuss matters. [Top] |
