The Practical Guide to Limited Company Tax
If you have chosen to operate your business as a limited com...
By Jonathan London on 28th August 2014
There are many ways for a contractor to operate in the UK. You can carry out your business as a limited company, through an umbrella company or as a sole trader. However, there used to be another popular way of working with contractors using managed service companies (MSC).
Each different method of operating comes with its own challenges and responsibilities. It is down to the individual to choose which is the best option to suit them.
The MSC method was made pretty much obsolete by HMRC 2007 legislation, and involved a group of contractors getting together as shareholders in a corporation run by the service provider.
The big draw for working through a MSC was due to the fact that it gave contractors all the tax perks of working through a limited company without the overall responsibility to go with it. In effect, workers would provide their end services to a client through the MSC without having any control over the company.
HMRC brought in “Tackling Managed Service Companies Legislation” in order to deal with those Managed Service Companies that were using the company to avoid paying national insurance and income tax. The crux of the matter came down to the Treasury deeming the contractors in these companies as Ã¢€œemployedÃ¢€ thus changing their status and and tax allowances.
As most MSC were set up as a way to earn higher net returns than the PAYE system, many companies dissolved once the legislation was put in place.
According to HMRC – The legislation applies whether the remuneration is received directly or indirectly and whatever the form in which it is received by the worker.
“The legislation also applies whether the MSC is based within the United Kingdom (UK) or outside the UK. If the MSC is based outside the UK for the purpose of seeking to avoid the legislation, there is a greater likelihood that HMRC will invoke the transfer of debt provisions.”
What’s more, in the event that an MSC is unable to pay the PAYE and NICs liability that it owed, these debts could be transferred to a third party, including the MSC directors (which could be the contractors themselves).
Due to the complications that the MSC legislation brought in, many contractors now avoid this way of working as it effectively makes an independent worker ’employed’ and therefore always caught by IR35.
Due to the fact that Managed Service Companies had no real assets, they could liquidate quickly and easily. Not only that, but the group could then start up the next day under a new name and begin trading again.
This obviously frustrated HMRC as it was hard to track a company that owed debt and even harder to make someone accountable for it.
Once the legislation was brought in, however, these debts could be transferred – as mentioned above.
If the tax office discovers unpaid liabilities that stemmed from and MSC they could attempt to take the contractors to a tribunal to reclaim the debt.
Any professionals who have worked through an MSC may be well advised to consult their accountants regarding these companies.
It may also be the case that some variations of Managed Service Companies and composite companies still operate and offer contractors the ability to work in this way. This can be confusing, especially to those who are new to working independently.
Setting up your own limited company carries more responsibility but it offers you greater control over important decisions. For more advice about operating through a limited company and the financial aspects of this, contact us and see what we can do for you.
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