LGCA MSC report

The Lawrence Grant, Chartered Accountants report on Consultant Technologies’ exposure to the proposed MSC legislation

Prompted by several Consultant Technologies employees’ concerns regarding the effect the proposed MSC legislation (due to take effect on 5 April 2007) might have on their income and whether or not Consultant Technologies would be considered as an MSC, we asked for an independent report from Graham Busch, senior partner at Lawrence Grant, Chartered Accountants (www.lawrencegrant.co.uk). This highly respected Middlesex firm, a member of the Geneva Group International, have been consulting on finance and legislative matters in the U.K. since 1969, offering unparalleled advice and service to clients across the business spectrum and on an international level.

Following is the full report from Lawrence Grant, Chartered Accountants, reproduced here with permission.

The 2007 Budget Report: The Taxman Attacks Managed Service Companies

Consultants in the IT industry have, over the past 6 or 7 years, been under sustained attack by HM Revenue and Customs in the form of the dreaded IR35 legislation. This amounts to a challenge to the legitimacy of “one-man” companies, based on the underlying concept of employment -v- self-employment. Pre-IR35, proprietors of such companies would typically take their profits out of the company in the form of a low salary plus high dividends, thereby avoiding both employers’ and employees’ National Insurance Contributions (“NIC’s”). Together this can amount to close on 25% of income if taken in salary form. The Revenue countered this by treating all amounts paid to such proprietors as salary, with a small allowance for nominal expenses.

As a result of IR35, many such consultants closed their “one-man” companies and were instead drawn into composite service companies, effectively carrying out the same work as before, but now receiving dividends and expense re-imbursements from a company with many different shareholders/employees like them. Such companies were less easily identifiable by the Revenue. Previously it was easy for a tax inspector to “spot” a one-man company but such service companies believed they remained below the radar screen and they flourished. Until 6th April 2007 that is!

The Chancellor’s 2007 Budget report contained new legislation, to be enacted later in 2007 but in the main effective from 6th April 2007, entitled “BN46 - Managed Service Companies”. The legislation is a direct, forceful and fatal attack on such companies.

In brief, a “Managed Service Company” (“MSC”) scheme is one under which:

• The services of individuals are provided by companies to other persons, and
• The greater part of the consideration for the provision of those services is paid to the individuals, and
• The “scheme provider” (the person who makes available the scheme) controls the finances and administration.

Where a company meets the definition of an MSC, there is a devastating three-pronged Revenue attack:

• The entire amount of the contract income, less provable expenses, is subject to both PAYE and NIC’s (including of course employers’ NIC’s).
• Many expenses currently claimed by individuals in such companies will no longer be allowable deductions for the individual.
• Any PAYE/NIC debts can be transferred by the Revenue to associates of the MSC in the event that the MSC is unable to pay same, through lack of funds, closure, etc.

The first point above on its own will effectively render MSC’s as loss-making and uneconomic to operate. Commentators firmly believe that the MSC will shortly become extinct.

So where now for contractors? The solution is to find a consultancy company which will not be classified as an MSC. A company which does not run or operate numbers of “sham” managed companies set-up solely for the purpose of avoiding tax. A bona fide employment company, providing a bona fide employment environment to contractors with many added benefits. A company which employs its contractors on a full-time permanent basis. A company which operates a proper and compliant PAYE scheme for all its employees. A company which does not run a “dividend-for salary” scheme of the kind which IR35 and the proposed legislation vigorously attack. A company providing full employee benefits, such as a pension scheme, sick leave, paid leave, maternity/paternity pay, etc. A company providing a company mobile phone, computer hardware/software as needed, re-imbursement of expenses and full employee rights under the law. A company providing employee loans, references, training and skill enhancement programmes. A company which does not run a network of managed service companies – a company which is one company and one company only.

There is a view that many contractors will now be driven back to “one-man” companies. It is our view that this will be tantamount to climbing the fence to go back into the lions’ den! We do not believe for one minute that the Revenue will not soften up on IR35 issues and hence this is not an option. The way forward for contractors is to align themselves to reputable consultancy companies who will provide a proper yet pro-active employment environment.

We believe that Consultant Technologies Ltd is such a company.

Lawrence Grant, Chartered Accountants
London 26th April 2007

Consultant Technologies affirms our confidence in the legitimacy and legal compliance of our business structure, asserts our disassociation with the targets of the proposed MSC legislation, and reaffirms our commitment to providing our present and future employees, as well as our agency partners, with superior personal administrative service, exceptional corporate benefits, flexible and innovative solutions, and fully compliant tax and payroll structures, supported by the independent advice of the industry’s leading accountancy and corporate governance consultants.

For more information, please visit www.consultant-tech.co.uk

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