12 December 2006

After 18 months of waiting the Chancellor has finally published his consultation paper, "Tackling Managed Services Companies" first referred to in 2005.

The good news is for those contractors who are genuinely self -employed, Government has confirmed their ability to work through a limited company and receive dividends. Compliant providers will still be able to offer services to these contractors in the future, subject to them allowing the contractor to have financial and management control of their own personal service company. The risk of IR35 remains but providers who have HMRC approval will clearly have a head start within the new regime.

There can be little doubt, given the approach adopted by the Chancellor, that Government is concerned about compliance within managed service companies. The key drivers for the Chancellor would seem to be to ensure that the correct level of tax is paid by contractors working on a self employed basis and that those who decide to work on a self employed basis are fully aware of the employment rights they are giving up.

At Brookson, we couldn't agree more with the underlying purpose of the Consultation Paper and Draft Regulations. However, the effect may be somewhat different. The Chancellor estimates that 240,000 contractors work through managed services companies and that the anticipated increase in tax collect is likely to be circa £250 million. If all of these individual contractors are forced into working in their own limited company with no support or assistance in how to manage their affairs the likelihood is that a large proportion of this potential collect will never be recovered.

At Brookson last year we paid 11,000 of these contractors on a regular basis and paid to the Exchequer a total of £92 million in Corporation Tax, PAYE and NIC and £92m in VAT. If the Chancellor's figures are correct then the amount of tax that should have been paid by all managed services companies in the sector would be over £4 billion.

Those within the sector who operate the system correctly and in some circumstances, as with Brookson, have HMRC approval are being tarred with the wrong brush. A service is provided to the contractor but a service is also provided to the Exchequer by ensuring compliance with all aspects of tax administration of potentially 240,000 individuals in the sector. HMRC created specialist teams to look at managed services companies five years ago. The problem for these teams, as with HMRC generally, is lack of resource. Rather than creating additional work load for HMRC in terms of having to chase up and potentially enquire in to an additional 240,000 individuals' tax affairs, it may have been more prudent for the Chancellor to add more resource for HMRC to tackle non compliance managed service companies. Instead, the Chancellor has proposed that it is far easier to try and remove the ability for a self employed individual to arrange their tax affairs in an efficient way whilst benefiting from the economies of scale of working with groups of similarly minded individuals. Why take away the ability to run a service which works so well when compliant because HMRC are under funded and under resourced to deal with non-compliant providers?

If the draft legislation goes through as it is written then the workload of an already over-stretched HMRC will vastly increase. This will be a key point raised in our response to the Consultation document.

The challenge for providers within the sector is to make sure that they evolve, as those operators who have been in business for any length of time have already done so many times before. The drive of the draft legislation is clear – the contractor needs to be a director of his own company, and manage his own financial affairs. Brookson will continue to do what it does now – provide a solution for the contractor which takes away the administrative burden of being self employed but which complies with the legislation which is brought into effect.

We welcome the Chancellor's proposals but disagree with his broad brush approach. We would have welcomed the opportunity to engage with the Chancellor before he released his draft legislation with a view to providing a more appropriate solution. We are where we are though.

We provide a service not just for the Contractor but also for HMRC as well. We intend to do exactly the same moving forward. Business as usual at Brookson.

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