13 December 2006

Martin Hesketh, MD at Brookson, provides a fresh update on the ‘Tackling Managed Services Companies' consultation process started by the Chancellor in his Pre-Budget Report:

"We have now had a good few days to study the detail of the document issued by the Chancellor and the proposals within it.”

So what do the proposals mean?

Self employment status

The consultation document clearly confirms that the Government recognise that individuals providing services to clients who are genuinely not disguised employees of that client are entitled to the benefits of self employment. They can work through a limited company and receive dividends. Written confirmation of this position is extremely positive for both contractors and recruitment agencies.

IR35 compliance

The document also re-confirms the importance of IR35 compliance in terms of contractors being entitled to the benefits of limited company working. Our expertise in employment status and IR35 compliance and our HMR&C approved compliance systems are of particular relevance here. Brookson members who have completed our HMRC approved IR35 compliance procedures have already proven their entitlement to dividends and expenses under the new regime.

Personal Service Company model

Essentially, the proposal is to group together Composites, One Man Managed and Umbrellas as "Managed Services Companies" and tax the limited companies that they manage for contractors in such a way as to make them unattractive to contractors. The document clearly indicates that contractors wishing to maintain the benefits of limited company working should use a personal service company (PSC). This involves the contractor owning his or her own limited company, taking the director role in it and exercising greater financial and managerial responsibility.

We believe that there is a strong argument for the use of efficient, well managed and compliant Composite companies, borne out by the HMRC approval of our structure in February of this year. We will make this point strongly during the consultation process.

Notwithstanding this view, if the PSC approach is required to enable self employed contractors to access the tax benefits they are genuinely entitled to, this is the approach we will take. Members will be able to enjoy all of the many benefits of Brookson membership, just as they do now, but will work through a one man limited company rather than a composite.

Transfer of debt

The proposals also contain a provision which, if the individual contractor is found not to be working through an appropriate personal service company, enables HMR&C to transfer the unpaid PAYE and NI debt to third parties who have been involved directly or indirectly in, and materially benefited from the services provided by managed service company. This is aimed at making the service provider, and potentially other third parties involved in the provision of the services, liable for any unpaid tax. This is a good move from a compliance perspective and is consistent with the Brookson approach as it already exists. We are responsible for ensuring we pay the right amount of tax for members and we are accountable for this. The HMR&C approval demonstrated that we have paid the right amount of tax for members. There are other service providers however who have avoided their tax obligations to contractors and these transfers of debt provisions are aimed at helping HMR&C take action against them.

So what happens now?

Well nothing changes in the immediate term. The consultation process runs from 6th December 2006 to 2nd March 2007. We will continue to provide our high quality, compliant, limited company services whilst we actively engage in the consultation process with the relevant organisations to ensure the legislation is as appropriate and workable as possible when it is finally implemented, which is confirmed as being from 6 April 2007.

We have already developed a personal limited company service that we believe will comply with the required legislative provisions and we are actively engaging with HMR&C to ensure that they are happy with the proposed approach. We are confident that we will be able to announce a new range of Brookson services early in the New Year that will provide a compliant working solution for all contractors irrespective of their IR35 status. This will provide a “one stop shop” solution for all contractor requirements.

Undoubtedly, there will be minor changes to the way in which we provide our services to members as a result of this proposed legislation. We will ensure that we keep any impact on both agencies and members down to a minimum. These changes offer real opportunity for recruitment agencies and members alike to ensure that they have a compliant, stable working solution in place for their future and Brookson will continue to provide high quality, professional services to support this.”

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