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Business advisors last night expressed “real shock” after Gordon Brown used his eleventh annual Budget to hit the leading business models used by freelance IT contractors. Making good on his pledge to tackle Managed Service Companies, the chancellor’s department said incoming laws will make users pay tax and NICs like employees. Despite his promise that yesterday would be a “Budget for business,” Mr Brown also hiked the small companies’ rate from 19 to 22 per cent, to target “individuals artificially incorporating.” The dual attack was obscured, however, by his headline-grabbing treats for the wider business community, such as a juicier than expected cut in corporation tax for big enterprises. As the clamping down on MSCs was anticipated, one legal advisor told CUK: “It is probably bigger news for IT contractors that the corporation tax for small companies has increased.” Even MSC providers, targeted by the Budget, agreed that a three per cent tax rise on the profits of incorporated companies represented the bigger assault on IT contractors. “Today’s Budget wasn’t one of the greatest from an IT contractor’s point of view,” Martin Hesketh, managing director of Brookson, told CUK in an interview. “The government’s promotion of flexible working seems at odds with the chancellor’s statements, where he appears to be encouraging people back into permanent employment by increasing the corporation tax for small businesses.” Under the Treasury’s proposals, corporation tax for small firms is due to rise to 22% by 2009, starting with a rise to 20% from as soon as next month. Admitting ‘concern’ over the chancellor making life easier for big businesses while penalising small ones, the Professional Contractors Group said it was ‘unsatisfied’ with the reason given. “The Treasury has justified this on the basis that a corporation tax rate lower than the income tax rate encourages tax-motivated incorporation,” the PCG said. The group, which lobbies for UK freelancers, doubted Mr Brown’s claim that firms will offset the tax rise by a wider R&D tax credit, a green tax credit, or a new Ł50,000 investment scheme. “Firstly, the new investment allowance is offered on the basis of encouraging companies to grow, yet this fails to recognise that many businesses do not wish to grow,” the PCG said in a statement. “Similarly, most will be unable to take advantage of the R&D tax credit or environmental tax credit, which are unsuitable for firms with no employees – who make up 73% of all businesses in the UK.” Chris Bryce, PCG’s deputy chairman, summed up that while the group recognises the chancellor’s efforts to offset the tax hike, “we believe that the uptake will be low.” He added: “We need a simpler tax system, not one that is complicated by more tax credits.” Instead, not only does the freelance business community now have to navigate a more complex system, it also has one that demands more of their hard-earned profits. Simon Dolan of chartered accountant SJD Accountancy explained: “Launching such a big increase in the small companies corporation tax rate from 19 to 22% signals a realisation [from the government]: IR35 doesn’t work, all the tinkering with self-employment tax doesn’t work, so a hike to the rate of small business corporation tax is the only way forward. “In doing this, the government can catch everybody – every small company, not just the consulting companies, but all of the small companies.” Mr Dolan said that while a three per cent tax increase across the board “is not a lot of money for each individual IT contractor,” it adds up to a “significant amount of money for the exchequer.” He added: “I was really shocked at the hike to corporation tax, but the more I think about it, the more clever it is, as it creates a precedent. “With higher rate corporation tax at 30%, reducing to 28% - and the small rate of corporation tax at 19%, rising to 22%, I think at some point in the future, the two may just be aligned. “I can see the government [eventually] saying, ‘there is a flat 25% corporation tax across the board, it’s fair, it’s simple and everyone pays the same,’” Mr Dolan said, adding: “but of course this would actually be unfair to smaller companies.” Similar language about micro companies already being disadvantaged by comparatively unfair tax treatment came yesterday from the Federation of Small Businesses. “The chancellor’s eleventh Budget…is no different to the others – he gives with one hand and takes with the other,” said federation chairman Carol Undy. “However, this year, after some welcome initiatives for our members he throws it all away with a tax hike aimed at small business. “Corporation tax was cut for large firms but increased for smaller ones,” she said. “Small businesses employ 58% of the private sector workforce - over twelve million people – and the increase in their tax rate fails to acknowledge their contribution.” Despite being ‘the UK’s largest pressure group for the self-employed’, the FSB failed to mention new laws designed to tackle managed service companies – a once-popular business model among the sector. Following a consultation on the legislation, which takes effect from April 6, between the Treasury and 81respondents, the government has said it will defer the ‘third party’ debt transfer rules. This means that from this date, only MSC scheme providers, and directors, office holders or associates of the MSC, will be pursued by the taxman for the recovery of employment taxes. Workers in the MSC remain within the scope of the debt transfer provisions, and seem likely to be liable for debts when they can be shown to have known that they were operating for a MSC. However, as of yesterday, this will only apply from January 2008 – with the respite for individuals to restructure their affairs also applicable to client companies and agencies. Though a cautionary note was sounded by the PCG: “From 6 April, HMRC will be able to pursue scheme providers and the directors of MSCs (which could in some circumstances include the worker whose services were provided) for debts if the MSC is unable to pay them – the delay to the debt transfer rules does not apply to these groups.” One legal advisor offered his preliminary take for IT contractors: “If the company paying the worker does not follow through with the legislation and therefore does not deduct the correct amount (of employment taxes) from April, then the worker will be paid more than they should have been, but the worker won’t necessarily be liable – as a third party – if he’s just a worker, until January. “In terms of the third party debt aspects, the worker can only be pursued by HMRC in respect to debts incurred from January onwards only.” Reflecting on agencies - his primary clients - the advisor added they would welcome the delay as a chance to give them extra time to work with the right business partners. Also issued in yesterday’s Budget were new definitions building on the idea of a MSC exercising control over the finances or general management of the company, adding a focus on the role and business of the MSC scheme provider itself. Legal experts say the change will make enforcement easier for Revenue officials Welcomed by the PCG, the updated definitions take PAYE umbrellas and independently run PSCs out of the scope of the legislation. “There are also explicit and specific exclusions such that providers of accountancy or other professional services cannot be found to be a scheme provider and employment agencies are out of scope too,” the group said. Meanwhile analysis from Brookson confirmed who is specifically included, under the new wording. “The principle point centres on ‘a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals is in involved with the companies.’” Managing director, Martin Hesketh commented: “’Involvement’, simplistically, is about influencing or controlling, so it's broadening the definition from control to influence or control. It’s now saying to MSCs, that if you’re influencing or controlling you’re thereby involved, and therefore you're caught by the law.” Within the draft legislation, there is specific exclusions for organisations providing legal services or providing accountancy and/or legal services. “Ultimately that’s what providers like Brookson will do,” Mr Hesketh said. “We’ll move towards simply providing those types of services. We’ll be pushed into providing services in a clunky manner which is not great for the contractor, but ultimately there will be a way of providing these services compliantly – there has to be.” The PCG expects that the new definitions will make it even more difficult for existing scheme providers to avoid the rules by giving their contractors ‘personal service companies.’ The trade group advised contractors currently with a MSC to use a limited company or a high-quality umbrella, “or else risk becoming part of a test case.” Simon Dolan agreed, citing the death of composite and managed service companies as now. “Without a shadow of a doubt they will die out of existence because MSCs can claim no expenses, and workers will have PAYE imposed on their lot. Or workers can use an umbrella structure and at least get some expenses. Or they can go through their own limited company and claim expenses and receive dividends. “So really,” he added, “there’s no point in using a composite or even trying to market one, as not only are they the worst possible choice out of the three business models, but as of six months’ time, a worker runs the risk of holding all other parties in its chain liable – the agency, end user, and certainly the provider.” Concluding its analysis, the PCG highlighted some text in the Budget that contractors may find hard to believe. “Labour market flexibility is central to the performance of the UK economy,” the government says. “A more flexible and efficient labour market has the ability to adapt more rapidly…” While these words were “heartening”, the group said yesterday, “a central part of this flexibility is the flexibility afforded by the UK’s freelancers and contractors.” In Whitehall, the Conservatives said Gordon Brown is bidding farewell to the Treasury with a Budget for the UK that was "a tax con not a tax cut." Mar 22, 2007 Email this article Printer friendly page Previous Page
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