Key tax dates and deadlines for 2018/19
It is an inevitable reality that, for anyone earning a livin...
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.
Take a look at our recent blogs below.
GDPR – the General Data Protection Regulation, comes into effect on 25th May and is the bigges...
Published: 24th May 2018
As a business owner, your time is way too precious to spend hours dealing with HMRC or Companies Hou...
Published: 14th May 2018
“Never do tomorrow what you can do today. Procrastination is the thief of time” Charles Dicken...
Published: 11th May 2018
Congratulations! The very fact you clicked this far shows you are considering employing staff, and t...
Published: 17th April 2018
It is out with the old and in with the new when it comes to tax relief on childcare costs from April...
Published: 9th April 2018
The Boox accounting app has always been at the forefront of helping our clients understand their com...
Published: 26th March 2018
Spring has officially sprung and the start of the 2018/19 tax year is just around the corner –...
Published: 23rd March 2018
If your business is employing staff, you should already have a workplace pension in place, under the...
Published: 23rd March 2018
At this time of the year we are used to seeing the Chancellor holding aloft the red box ahead of the...
Published: 15th March 2018
A dispute has erupted between the BBC and 170 of its presenters over their tax arrangements and thei...
Published: 12th March 2018
The rush for taxpayers to file their 2016-17 self-assessment tax return is over for another year, an...
Published: 27th February 2018
If you need a little help to find the right accountancy service, don’t worry.
Get in touch with our friendly team for a FREE service consultation.
Thousands of contractors, freelancers and locums turn to Boox for help and advice with their limited company accounting. They love our personal service and app.
Specialist accounting for sole traders and the self employed, Boox combines easy online tools with expert support to take away the stress of handling your accounts.
Our combination of market-leading accounting software and expert personal advice gives you greater financial control and more time to grow your business.