Contractors must now change the way they work or lose thousands!
In the 2007, budget new legislation came into force from 6th April which removes the tax advantages that Composite and Managed Service Companies offer their clients. If you are a contractor working within one of these 'schemes' you will need to change immediately to protect your income.
To quote directly from the document published by HMR&C:
“The Government has decided to remove MSC's (Managed Service Companies) from the scope of the intermediaries legislation and to apply a tax treatment to those working in MSC's which means they will pay tax and NIC's at the same level as other employee's”
Simply, this means that anyone working through an MSC will no longer be able to receive dividends from that company, regardless of whether they are inside or outside of IR35, but must receive payment via PAYE and must pay income tax and national insurance contributions which will be applied to their whole earnings.
In order to receive dividends, assuming that your contract is outside IR35, you must set up your own Limited Company over which you must have total control of the bank account and complete freedom to make your own business decisions. This will obviously increase the amount of administration and time spent managing your tax affairs, you will also be legally responsible as a company director to ensure the company is run correctly.
The Government will be enforcing the new rules with additional legislation which will allow the transfer of debts for income tax and national insurance contributions to “appropriate third parties who have been involved directly or indirectly in, and who have materially benefited from, the MSC's provision of services”. This is further clarified later in the document - “The proposed legislation will allow HMRC to seek to recover the PAYE and NIC's debt of an MSC from any one of the parties actively involved with the MSC who is within the scope of the legislation”.
The Government's intention to pursue the debt to its fullest extent is reinforced still further – “If the debt proves irrecoverable from that party then the notice can be cancelled and a new notice issued to another party”
This means that any contractor who continues to operate in a third party scheme that pays them dividends, will be liable for the additional income tax and national insurance contributions that are due to the Inland Revenue. However, this debt can also be recovered from any third party that has been associated with or benefitted from the scheme; this could be the scheme owners or even agencies who have received financial incentives. The Government has even taken this one step further and has said that if the debt cannot be recovered from, say, the contractor then they will pursue the scheme owner; in fact they will pursue any avenue until the debt is paid. This legislation could have very far reaching consequences for the whole industry.
No scheme will be able to 'get around' this new legislation as it has been purposely written to be as straight forward and as unambiguous as possible.
The only realistic option for contractors who do not want the worry of running their own limited business is to operate through a fully compliant employment services company. With ContractorUmbrella, you have the security of knowing that your payments will be made to you through PAYE and that your earnings are protected.