A chorus of industry voices urging the government to defer “far reaching” new regulations for Managed Service Companies (MSCs) has got through to officials at HM Treasury.
The Times claims the unpopular MSC debt transfer rules - dictating ‘third parties’ may be liable for employment taxes – face a delay of up to six months from April 6.
Although the legislation will stick to the state’s policy of cracking down on freelancers who do not pay their ‘fair share’ of tax, the move reflects a “pragmatic” approach, the paper reported.
The article said delaying by up to six months the date from which the Revenue will enforce third party rules would afford employers more time to ascertain contractors’ tax status.
“This is nothing more than speculation,” a Treasury spokesperson told Freelance UK.
“We have always been clear that the final package of measures will be set out in the Budget.”
Some business experts were less dismissive about the prospect of a six-month wait before 'third parties', which includes end-clients and recruiters, face a tax bill for contractors’ debts.
If there is a delay, “perhaps it’s because it is beginning to dawn on the government that their proposals, as presently drafted, may be flawed”, said one legal advisor to MSCs.
His view - that the anti-avoidance legislation is sound in principle, but that the debt transfer rules are unworkable - is the stance taken by a growing number of business and tax experts.
Last month, the Institute of Chartered Accountants in Scotland (ICAS) said: “We are calling on the government to put off applying the new provisions for a further year, to allow innocent businesses and individual workers time to rearrange their affairs. Otherwise, the new rules will penalise those for whom they were not intended.”
The Institute of Directors is less than the convinced by the Treasury’s claim, alluded to by the institute, that the “wholly innocent will not be caught.”
Richard Baron, head of taxation, said of the third party rules: “This is a sweeping power for HM Revenue & Customs to collect whatever money they can, from whoever they can.”
Yesterday the Institute of Chartered Accountants in England and Wales confirmed it has joined ICAS, the Chartered Institute of Taxation (CIOT), the Professional Contractors Group (PCG), the Recruitment & Employment Confederation and the Association of Technology Staffing Companies in voicing the consensus to the Treasury.
“We are particularly concerned at the number of new companies being registered at Companies House and which will presumably be going on to seek VAT registration,” Anita Monteith, technical manager at the ICAEW’s tax faculty, told FUK in a statement.
“This will slow down the registration process for genuine new businesses at a critical period.”
Fresh figures obtained yesterday from Companies House reveal that the number of new registrations each month has leapt from a steady 7,500 (for November) - to around 31,000 (for February).
According to a spokesman, the record formation of over 124,000 companies in the three months from December is inextricably linked to the incoming MSC legislation.
Reflecting after the PBR, accountants said any rules that levy employment taxes on users of managed service companies would spark a dash to incorporate, similar to that seen after the introduction of zero-rate corporation tax.
Asked yesterday about the prospect of delaying the debt transfer regulations for a six-month period, one advisor to contractors said it wouldn’t make managed service companies any more appealing.
“MSCs will still become an inefficient way to trade, and so lose any competitive advantage they might have had up to now,” said Roger Sinclair, legal consultant at Egos Ltd.
“If [the transfer provisions are] delayed, I don’t expect any interim halfway house – just that the parties who are presently liable will remain so – those whose tax liability it in fact is.”
“Put another way, if there is an actual or potential liability today, then there still will be for the next six months – there won’t be a holiday.”
Any postponing of the third party rules appears more likely, however, in light of their “far reaching …potential impact,” which includes “significant scope” for “unintended” consequences, Mr Sinclair warned.
Similarly worded cautions about the potential for adverse uncalculated effects have been sounded by the PCG.
In its submission to the Treasury, the group said inspectors “may chance their arm” by trying to bring independent limited company owners into the scope of the new legislation.
Likewise, the CIOT hinted that the long list of third parties potentially liable for outstanding tax creates room for overzealous enforcement officials.
“We know that both HMRC and HM Treasury are aware that behind the continued growth in MSCs lie inherent differences in the amounts of tax paid by the employed, the self-employed and those working through a company outside of IR35,” the CIOT said.
“While these differences survive, the temptation to arbitrage them for all parties (engager, worker and intermediate agencies) will be very high.”
Under the current proposals, both the PAYE and NIC debts of MSCs that cannot be recovered can be transferred to “appropriate third parties.”
Potentially, “third parties” includes employment agencies, end-clients, and a worker in an MSC who is not a director or officer of the company, but where they “could reasonably be expected” to know they were operating via a MSC.
HM Revenue & Customs says the test it will apply is whether the person has, “encouraged, facilitated or otherwise been involved in the provision by the MSC of the services of the relevant individual.”
Mar 16, 2007
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