Challenge to Service Companies who are ignoring IR35

The Government has announced a consultation on the employment status of contractors in the Budget Report (22/03/06), which will Ötackle disguised employment through managed service company schemes.*

The allegation by the Government that managed service companies (MSCs) are being used as vehicles for disguising employment income follows on from its attack on one-man limited companies which resulted in IR35 tax legislation. HMRC are concerned that some companies that operate a ëmanaged serviceí are clearly not complying with IR35.

MSCs that were not IR35 compliant have in the past left contractors with hefty tax bills when their status has been challenged.

Matthew Brown, Managing Director, giant group, the contractor services provider, comments: More regulation of the providers of MSCs would be a positive step. Greater regulation will raise standards across the staffing industry and protect contractors from unscrupulous operators who abdicate their responsibility and in some cases leave contractors ignorant of their potential liability.

According to giant group, the manner in which MSCs should operate is outlined in Revenue & Customs Tax Bulletins 60 and 74. The bulletins clearly state that the IR35 rules are just as applicable to MSCs as to one-man limited companies.

Matthew Brown says: Some form of official accreditation, which might take the form of bringing MSCs under the remit of the HMRC disclosure rules, would reduce the risk of illicit schemes, (including those with illegal overseas/ international aspects), being marketed to contractors in the future.

This could be good news not just for contractors but the professional staffing industry and end users of contractorsí services.

We will be making representations to HMRC during the consultation period to ensure that we get regulations that are workable.

According to giant, which offers a full range of compliant contractor solutions whether inside or outside IR35, contractors operating through its managed service company, giant powerhouse, already enjoy the benefits of rigorous self-regulation.

Contractors operating through giant powerhouse are only allowed to receive dividends after an independent review of their contract and working practices by Qdos Consulting on an assignment-by-assignment basis. Furthermore, contractors are then covered by giantís exclusive IR35 insurance, underwritten by Groupama, against any claims for tax, NICs, interest or fines.

In summary it appears that while the IR35 legislation has been around since 2000, HMRC believe some managed service companies are openly ignoring it and now intend, after consultation, to stop this abuse.

* The report states: Since the Pre-Budget Report, further evidence has emerged that employment income is being disguised as dividends in order to take advantage of the small companiesí tax rate, often encouraged by promoters of mass-marketed managed service company schemes.

There is also evidence of some agencies, contractors and employers requiring workers to use corporate structures, thereby denying them employment rights as well as avoiding paying their fair share of tax and NICs.