Income Shifting Legislation

Article provided by IT Contractor Accountants, JSA Group.

It is perhaps not surprising to see the rush of Managed Service Companies welcoming the Chancellor's Pre-Budget announcement to "tackle" their operational practices. What else would they say? While we all agree that a level playing field is desirable and that illegal non-compliant practices should be legislated against, to once again attack the hard working, industrious freeelance community just because the Revenue is finding it difficult to apply their Intermediaries legislation (IR35) seems somewhat harsh.

There are clearly a number of bad apples in the Managed Service Company market and in desperation for more tax, the Government has once again chosen to take a sledge hammer to crack a nut. From its own impact assessment, the Government estimates that there are about 150 Managed Service Company providers (MSC's), with only 15 taking the lion's share of the market. Surely if compliance was the Government's only concern, how hard would it be to properly police this relatively small and select market? Afterall, if the Intermediaries Legislation is correctly applied, then what can be wrong with the convenience of freelancers operating through a Composite Company? Surely having a 3rd party orgaise your invoicing, accounting and other financial affairs via a composite company does not disqualify a contractor from being in business on his/her own account.

Now that everyone has had the opportunity to "welcome" the proposed legislation and consider its effects, it is time to address the issues it raises and reflect on how the market will look post April 6th 2007. In spite of what is being claimed (by those with the most to gain), operating as a one person Personal Service Company (PSC) will NOT neccessarily be the solution for everyone. What of the low paid or short term contractor, or indeed those that struggle with administration? Nor will being employed under PAYE by another solution provider (as others claim) necessarily be best for all freelancers, especially those who can successfully demonstrate that they are not caught by IR35.

Firstly, it is safe to assume that the legislation to be enacted next year will look and feel very similar to that currently proposed by the Chancellor. If the Government genuinely intended to "consult", then they would not have left themselves a hidiously short amount of time to do so. So we can assume that the consultation period can be nothing more than paying lip service to that process. That being the case, MSC's as we now know them will cease to function after April 5th 2007. However, agencies and freelancers alike should note that until then, there is nothing wrong with a fully compliant and professionally run MSC. But agencies, freelancers and MSC's alike will need to prepare themselves for a period of transition into new accounting arrangements.

For those contractors already in "compliant" composite arrangements (i.e., fully IR35 compliant), this should not prove to be complicated as it should involve nothing more than moving from one Limited Company (Composite) arrangemet to another (PSC). No doubt the MSC's will help make this process as painless as possible. For contractors who have become used to an "easy" corporate life, no doubt additional administrative services will be available so that they again can enjoy the benefits of minimal administrative duties. (It would be interesting to understand why the Government believes that simply because a contractor operating legitimately outside IR35 and who chooses a MSC to minimise their administration is not neccessarily in business on their own account, as the commentary accompanying the proposed legislation suggests). Unfortunately, for those who chose to ignore IR35 before and presumably to whom this legislation is primarily aimed, operating as a PSC instead of a Composite will do nothing to make them more compliant after next April. Indeed it could be argued that the Government's job of applying the Intermediaries Legislation will become considerably harder as a result of these proposals.

And for those compliant contractors now caught by IR35, nothing much should change. An umbrella company currently paying their contractors under PAYE will have to look carefully at their expenses policy, but otherwise these proposals should leave them relatively unaffected.

Now that the initial period of rhetoric is over and the PR men have packed their bags, those of us who have always operated within the law and/or offered only fully compliant solutions are left to grapple with yet another raft of rules and regulations ultimately designed to increase the tax take from hard working independent businesses. Those determined to operate outside of the law will no doubt continue to do so and these proposals will do nothing to stop them. While a minority clearly abused the system, would it not have made more sense to simply licence the MSC industry (all 150 of them!) than dissipate their illegal practices into the ether of the PSC market?

In the meantime, if you are an agency engaging contractors through a legitimate MSC or are a contractor working through a legitimate MSC, there is no need to panic. The new legislation will not be effective until 6th April 2007 and this certainly leaves time to migrate from a Composite arrangement into a PSC or PAYE solution. A considered, calm and practical approach is all that is now required and those organisations suggesting otherwise should be chastised for trying to make us think otherwise.