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To switch and how to switch? – The ‘Controlling’ influence

Published on Feb 7, 2007 |

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Gordon Brown's intention to crack down on Managed and Composite Service companies has been well reported within the contracting market, but if you are working through a company which falls under this definition do you really know what to do?

Some views are that freelancers working via an Umbrella Company will simply stay where they are and accept that they will be worse off. And freelancers working through a Composite Company arrangement will switch into a Personal Service Company set up by their current Composite Provider.

Is this really what is going to happen? Phil Richards, Chief Executive Officer of Manager Group Ltd, doesn't necessarily think this is the best option.

“Freelancers really need to consider their options wisely, and not assume that they should stay in their current Umbrella Arrangement or with their current Composite Provider.”

“Freelancers need to look at the possibilities of working through their own Limited Company or ‘Personal Service Company’ which is not caught by the regulations. Even if they are deemed to be inside of IR35 they may still be better off as they can capitalise on the 5% tax allowance for business expenses.”

It is also important to consider the responsibilities of working via your own Limited Company and it should be pointed out that it may not be for everyone, but there are companies such as Manager Group who can provide a free limited company set up and then take care of all the administration required to run the company legally and tax effectively, whilst the freelancer retains control and responsibility for the company.

The fact that the freelancer is in control of their own Personal Service Company is a key point in the new rules and IR35. Companies such as Manager Group help the freelancer to be an independent business person running their own company. Importantly, whilst these companies make it easier for the freelancer, the freelancer still has to run their own business.

It appears that some companies who are currently operating a ‘Managed or Composite’ structure are planning to convert their existing arrangements into a one person, one shareholder Limited Company Arrangement in an attempt to comply with the proposed regulations.

Phil Richards warns of the possible dangers of this. “Careful consideration should be given by any person currently working through a Managed or Composite Structure where the service provider is planning to convert the structure over to a sole director and shareholder of their own limited company, as this could perhaps be perceived by HMRC as the Managed Service Provider still having the controlling influence?”

“If you receive a letter from your Managed Service Provider informing you that your company will change to a Personal Service Company when the new rules come in, that would seem to me, that the Managed Service Provider is still ‘Controlling’ the freelancer and the Limited Company, which could be very dangerous within this new framework.”

This does raise an interesting debate over the ‘Controlling’ influence and how far this goes. Should freelancers working through a Personal Service Company be wary of their accountant who includes such fees for the Company’s Annual Return within their monthly fee instead of requesting a separate payment or asking the freelancer to pay Companies House direct?

“I think it is important for everyone to remember that the freelancer is running their own business, and accountants are there to support and help that lifestyle choice” said Phil Richards.

The best advice for freelancers is to do your calculations before contemplating a switch to a PAYE Umbrella Company or Personal Service Company, and perhaps most importantly instigate and control the change yourself.

Article penned by The Manager Group.