Income Shifting Legislation

The Treasury's plan to introduce legislation in April, which will effectively close down Managed Service Companies, is likely to drive the non-compliance problem underground, push up contractors'; pay rates and swamp Companies House with applications to form Personal Services Companies. That is the view of Barry Roback, Chief Executive of JSA, the IT contractor accountancy provider.

Speaking to almost one hundred recruitment consultants yesterday, at a seminar organised by JSA at the Mermaid Conference Centre in London, he said that those who were determined to operate outside the law, would no doubt continue to do so, and that these proposals would do nothing to stop them. In the meantime, the legislation would fail to deal with the real problem of clearly defining employment status in a rational and consistent way.

He said that although the Government claimed that Managed Service Company schemes were 'disguised employment', this was clearly not the case for those which were run strictly in accordance with the Treasury's own rules. However it would now be necessary for those contractors already in fully IR35 compliant arrangements in composite companies, to move into personal services companies. "At present it is virtually impossible for HMRC to check the IR35 status of the 240,000 contractors in Managed Service Companies, even though there are only around 150 MSC providers. It will be even more difficult to monitor them, once they are working under a much more diverse PSC regime."

Kevin Barrow, Partner in Blake Lapthorn Tarlo Lyons, warned recruiters that HMRC was potentially being given the power not just to pursue contractors, but also to chase any other person who it thought had materially benefited from MSC arrangements, including employment businesses who referred contractors to a MSC scheme provider or who operated their own. The new legislation could potentially also apply to individual employees of agencies who received a referral fee, and to end-users and agencies who turned a knowing blind eye to a contractor's tax position.

Barrow said that the future status of 'umbrella'companies was also unclear. Although the draft legislation appeared to leave them untouched, he claimed that this was more through bad drafting than specific intent. However he said that they might survive while travel dispensations remained permissible.

Barrow also pointed out that some contractors would feel disgruntled because their take home would be reduced under the proposed regime. This was likely to lead to demands for higher gross rates, in order to leave contractors in the same net position, as happened after the introduction of IR35. Agencies would also be faced with a lot more paperwork, as thousands of new contracts would have to be entered into so that all terms were in one document in order to comply with the Conduct of Employment Businesses Regulations 2003. Furthermore, he said, agencies would have to vet thousands of new personal services contracts to check they were properly incorporated and VAT registered. He also raised concern over the validity of current "opt-outs" in those circumstances.

Barrow warned agencies that in future, they would not only have to consider whether they should continue to run MSC schemes, but also to desist from accepting referral fees or favourable terms from sole or preferred suppliers. This should also apply to referral incentives to individual consultants.

However Barry Roback concluded that this proposed legislation did not signify the end of contracting, but simply another misguided attempt by the Treasury to pull in much needed cash. He pointed out that specialist companies such as his own were able to offer in-house training for recruitment agencies, provide vetting and compliance procedures and help to deal with the pile of transitional paper work that would be required.

"It is ironic" concluded Roback "that the proposed legislation which was intended to deal with miscreants, will actually make life much more difficult for those who already fully comply with tax laws, while making it much easier for those who are persistent tax evaders."