The 9 Key Questions All Contractors are Asking

The 9 Key Questions All Contractors are Asking about the Impending Legislation tacking Managed Service Companies and Composites.

1) NEW LEGISLATION ñ SHOULD I DECIDE/JUMP NOW?
As many of you are aware the Government are proposing new legislation effective 6th April 2007 which targets Managed Service Providers (MSPs). Since IR35, many contractors have moved their company affairs into the hands of MSPs hence this potentially affects the majority of IT Contractors.KPC believes that there is no need to panic or bow to pressure from any provider.The legislation is in draft form and lobbying of the Government is currently in full swing. The Government have suggested that they will announce their response by Mid March. Currently there is much speculation which has resulted in many MSPs proactively advising alternative means of working. The advice by most neutral parties is to wait until the full legislation is announced.A word of caution: Once the legislation is announced, it could then be a busy second half of March for those affected. You should use this time window to understand the options.

2) WHAT IS THE LEGISLATION?
The legislation seeks to set rules of remuneration for those that are not in Control of their own company. The definition of ëcontrolí is open to interpretation, but clearly a Contractor who is not a Director of his/her own Company would be just an employee. As such they must be remunerated as an employee paying full PAYE Income Tax and National Insurance Contributions. Therefore the legislation targets primarily Composite schemes where the Contractor is not a Director, but is an employee and shareholder. The legislation will mean that no dividends can be paid. Therefore most MSPs will stop the availability of Composite schemes from 6th April 2007.

3) WHAT IS THE DEFINITION OF CONTROL?
The definition of Control is likely to be deemed as exerting financial and management control over the company. Therefore a MSP providing such a service, even to a Personal Service Company (IE one that is acting in the supply chain and automatically deducting the service fee before passing on the money to the Contractorís company) might be deemed as control. A MSP who controls the Contractor Company bank account or makes tax payments might also infer control.Note: KPC doesnít believe IR35 applies to MSPs under the new legislation. However the legislation is effectively imposing the same tax rules as IR35.

4) WHAT IS THE POTENTIAL AFFECT OF LEGISLATION?
There appears to be an early view that a return to PSCs (Personal Service Companies) is the natural solution. A PSC is where the contractor has his/her own company, is Director, Employee and Shareholder. This is of course how the contractor used to operate prior to IR35, and is how many are still working today. Many simply hire the service of an accountant to prepare and file yearend accounts and to provide guidance to payroll contributions. The contractor company invoices the Agent directly and is sole signatory on their bank accounts. The accountant would invoice their fee and be paid by one annual payment or via a monthly standing order. Therefore a contractor is in ëcontrolí of his financial and company affairs. If a contractor operates thru a PSC and is in control, then the new legislation has no effect. However a PSC then falls within the IR35 legislation and contractors must decide whether they fall in or out of this legislation depending on their contractual relationship.Of course this does not mean that all MSP schemes will be affected. Umbrella schemes whereby contractors are paid fully in Salary, with no dividends will also remain unaffected. One final point is that the legislation also brings in expense restrictions. Claiming travel from home to work will not be allowed.

5) WHAT IS THE AFFECT ON THE AGENCY?
Within the legislation is Debt Transfer. If an agency is entering into a relationship with a MSP, then the legislation allows the Government to assign any unrecoverable debt to any associated 3rd party I.E. the Agency or the Client. Until the final legislation is known, the result of this will not be clear. However in its current form Agencies will have to assess the risk of entering into a relationship with a MSP. It is assumed that many will simply not enter into such contractual relationships and hence contractors may have to switch schemes, or agencies will have to satisfy themselves of the schemes compliance.

6) WHAT IS THE AFFECT ON THE CONTRACTOR?
Contractors operating thru a MSP scheme whereby they are remunerated other than salary will need to be very careful. Expenses will need to be valid. If any scheme that offers dividends or other payments, then a debt risk exists. Hence it is envisaged that contractors may need to change to another scheme, namely Umbrella or PSC. Contractors will also need to look at the relationship with their MSP if they so choose to still operate via a PSC under a MSP. There is a view within the market that contractors under 20 an hour are probably already working via Umbrella schemes given that their annual gross income does not take them into the higher band for income tax. Hence, apart from restricted expenses, will remain largely unaffected unless the agency decides not to transact with a MSP. Contractors earning over 20 an hour will normally pay their higher earnings in dividends which carry a lower tax payment than higher rate income tax and NIC. Hence these contractors who operate such a remuneration policy via a MSP Composite scheme will definitely be affected.NOTE: It is expected that there will also be new questions added to end of year Tax Returns to validate operating status. Contractors will therefore find it difficult to avoid the legislation.

7) WHAT IS THE AFFECT ON THE MSP?
There is a view that some agencies may simply reject transacting with an MSP. Some MSPs will move to acting as an accountant for PSCs. MSPs will still operate Umbrella schemes.

8) WHAT IS THE AFFECT ON THE CLIENT?
Clearly Debt Transfer will become a huge issue for Clients, who will not allow a situation whereby they can become liable for a potential claim for unrecoverable tax debt of a contractor. I imagine Clients could soon dictate to agents the operating status of the contractor E.G. there is already one KPC client dictating that contractors cannot operate through any scheme paying dividends.

9) WHAT IS KPC DOING ABOUT THIS?
KPC is a proactive member of the REC and are actively involved in the REC lobbying committee working with the Treasury trying to influence the Government over this legislation. KPC will monitor the result of these discussions and will make relevant announcements as facts / opinion is formed. Any definitive decisions will also be passed on. If you have any questions, please contact Dale Smith on ds@kpcl.comDale SmithDirector