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IT Contractors vindicated as MPs criticise Managed Service Company legislation

Published on May 2, 2007 |

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MPs repeatedly cited the Professional Contractors Group’s (PCG) analysis as they criticised the new tax rules for Managed Service Companies(MSC's) during the debate on the Finance Bill yesterday.

The Conservatives’ Shadow Chief Secretary to the Treasury, Theresa Villiers MP, opened her contribution to the debate with reference to PCG, and stated that, “the proposals are a clear acknowledgement that IR35 has failed. If the Government had got IR35 right, they would not need to bring further complex legislation before the House.”

She continued: “The Government said at the time that that would raise £300 million for the Exchequer, and cost it just £55,000 a year ongoing to implement. However, of the IR35 investigations known to the Professional Contractors Group, 1,405 concluded that the taxpayer in question was outside IR35, and only three concluded that the taxpayer was within its provisions. The Government have repeatedly refused to publish any figures on the amount of revenue collected under IR35 or on its ongoing cost impact for contracts. The truth is that IR35 has been a hugely expensive failure.”

The Liberal Democrats were represented in the debate by both their Shadow Chancellor, Vince Cable MP, and their Shadow Chief Secretary to the Treasury, Julia Goldsworthy MP. Dr Cable stated: “The Professional Contractors Group said that it would welcome a six-month delay because the proposals had caused much confusion among legitimate small businesses, especially the question of whether accountants could be deemed to be scheme providers under the Bill. The PCG is an important voice in the debate.”

The new rules were nevertheless passed unamended, owing to the Government’s majority (265 votes to against amending the legislation, 123 in favour). The Financial Secretary to the Treasury, John Healey MP, made some positive comments on the scope of the new laws. “From the outset we have constantly made it clear that our intention is that the legislation will not hit those working through personal service companies. The legislation was drafted with that intention and it remains our clear purpose...” PCG understands the Minister’s reference to “personal service companies” to entail the independent limited companies used by contractors who are in business on their own account.

The Minister also said: “Let me make it clear that [...] the purpose of the legislation is not to include within the definition of an MSC provider accountants, tax advisers, lawyers and company secretaries, who provide advice or other professional services to companies and individual clients. Those parties are not in the business of promoting or facilitating the use of companies to provide the services of individuals. Nor are they regarded as involved with the company in the way that the legislation envisages.”

Stephen Hesford MP spoke in favour of the new rules, saying that he feels the concerns expressed about them are just as unfounded as those expressed about IR35: “Of all those constituents who expressed concern about what the effects of IR35 might be... none came back to tell me that their fears had been borne out”. PCG urges freelancers and contractors in Mr Hesford’s constituency, Wirral West, to write to him outlining the difficulties IR35 has caused.

The full debate on the MSC rules can be read in Hansard.

The next stage in the passage of the Finance Bill will be a more detailed debate in the Public Bill Committee.