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| CURRENT SECTION :: Money | UK's most visited IT Contractor Site - 250k unique visitors March 2008 |
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Let's be under no illusions: IT contractors organise their affairs so they can work efficiently, minimise headaches and maximise earnings. There is nothing wrong with it, it's always been that way and it always will be. And a legitimate method for maximising earnings is to minimise taxes. Whatever the government decides, IT contractors, most of whom have a good semblance of wit, will arrange their affairs, gather advice from lawyers, accountants and peers, and organise their work to reduce the tax bill. If that means a Ltd. company or an umbrella arrangement, so be it. Trouble is, every few years the government moves the goal posts because it decides it doesn't like the way things have turned out, and the chancellor's pre-budget report (PBR) announced a witch hunt of managed services companies (MSC). A few years ago, in the light of IR35, many contractors gave up running Ltd. companies in favour of umbrellas or other MSC structures. It was efficient, you didn't have to bother with VAT returns, PAYE or calculating dividends and, despite being frowned on at first, it became a respectable way to run your contracting. Now, suddenly, advantages have been stripped away because HMRC has decided "the underlying nature of the contracts in which they [MSCs] are involved is one of employment," and is about to change the law to remove the tax advantages. Therefore, with a deep sense of deja-vu, contractors will ditch MSCs in their droves and return to running their own Ltd. Companies, and take their chances with IR35 (which they have calculated to be rather good.) Kate Cottrell, co-founder of employment status advisors Bauer & Cottrell, told Contractor UK: "Anyone currently going through one of these schemes (which includes composites and umbrellas) is likely to suffer a serious pay cut in April as home to work travel and subsistence payments and/or dividends will no longer feature as part of their pay. It is likely that many will now consider setting up their own Personal Service Company." This is exactly what one software development contractor, Robert Dorney, will be doing. He used to run his own Ltd. company but opted for an umbrella to help him organise his business and accounts without fuss. Now the umbrellas are not quite so weather proof, Dorney's going back to a Ltd. firm, and figures the taxman will have a horrendous time pursuing mushrooming numbers of single-man Ltd. companies under IR35. Umbrellas and other MSC companies have made themselves too big a target, he says, and many of them have flaunted tax advantages under HMRC's IR35-soaked nose. And almost in anticipation of the dash-to-incorporate, the Professional Contractors' Group is even setting up a fast-track Ltd. company service: "PCG OneStop, will allow contractors to obtain a limited company, accountant, business bank account and everything else they need in one go, in full compliance with the law and to a high standard." The government has determined it cannot let MSCs operate without taking a bigger slice, but it must be particularly irksome for the government to realise it inflated the popularity of MSCs in the first place by introducing IR35, and now has to patch the hole it created. But any new legislation is likely to be just as unworkable as IR35 has proved. With the intermediaries legislation (usually know as just IR35) the government struggled to define "employment," and has been found wanting by the courts. With any new MSC legislation, the government will struggle to define an MSC and has already hinted at the trouble to come in its recent "Tackling Managed Services Companies" document. "An effective definition of MSCs is key to this approach, and the Government is therefore consulting on the legislation to ensure that MSC schemes are accurately targeted." A large percentage of the document is dedicated to determining exactly what an MSC company looks like. If ever there was fodder for lawyers, this is it. And even if lawyers can agree on what an MSC looks like, for the legislation to work it still has to be proved that workers are "disguised employees," which is exactly where IR35 fell apart. The government is confident however and uses the phrase, "Workers in MSCs are almost invariably not in business on their own account," as if it was certain of the facts. But so often is the phrase used during the document that it makes one a tad suspicious the authors really know what's going on. To be fair to the government, there's a lot more at stake than the handful of IT contractors operating under MSCs. The document cites examples of happily employed personnel being forced to change to MSC schemes so that their employers can keep the tax savings, and of asset-less MSC companies liquidating the minute IR35 inspectors telephone to say, "Hi." So regulation is desperately needed in some form. Nonetheless, governments mucking about with legislation in this area cause IT contractors real headaches. IT contractors will pay fair rates to avoid paperwork, bookkeeping and having to worry about structure or whether they should accept an invitation to the Christmas party, which is why MSCs have been popular. But as one contractor put it while reflecting on a mass migration back to running Ltd. companies, "The holiday is over and we have to start saving receipts again, eh! Well thanks for the holiday Gordon." William Knight Previous Page
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