Genuine Limited Companies Unaffected by New MSC Tax Rules, Says Freelance Group

by Jason Gorringe, Tax-News.com, London

10 April 2007

The Professional Contractors Group (PCG), the freelance pressure group, has assured the UK's freelance community that ordinary limited companies are unaffected by the new tax rules on Managed Service Companies (MSCs).

The PCG's statement follows at least one MSC scheme provider appearing to issue confusing advice to contractors and agencies last week.

"Some bodies are misreading the new legislation and offering contractors, agencies and clients poor advice as a result - they should be ignored," said the PCG's chief executive officer John Thomas. "Contractors using limited companies, and accountants, are outside the scope of the new rules - end of story."

Some scheme providers had initially attempted to get round the new rules by creating thousands of individual "Personal Service Companies" through which to pay their contractors. But according to the PCG, the recent announcement that one leading provider, Giant, is abandoning PSCs entirely and switching all its contractors to a PAYE Umbrella is evidence that this approach will not work.

"Although their advice document to contractors and agencies yesterday unfortunately served to confuse many, we must commend Giant for their straightforward press statement today," added Thomas. "They have clearly stated that the legislation makes all "provider" services unviable, with the exception of PAYE Umbrellas."

PCG advises all contractors currently with a MSC whose scheme provider has assured them that their tax treatment will not be affected by the new rules to switch to a genuine limited company or a PAYE Umbrella.

Other groups have suggested that ordinary accountants whose clients are limited company contractors will be caught by the new rules: this is a misreading of the legislation.

HM Revenue & Customs have issued a statement on the effects of the new legislation:

“HMRC have confirmed their view that the legislation is not intended to, nor does it, encompass service companies used by those genuinely in business on their own account and the accountancy services provided to such companies. The legislation addresses the discrete issue of those seeking to avoid employed levels of tax and NICs by providing services though a company which is promoted and facilitated in a way that is quite distinct from professional accountancy services."

The PCG also warns contractors to be wary of the term "PSC" as it has no basis in law and the PCG does not use it. The group says that the best route for contractors who wish to operate in business is to set up their own limited company. Genuine limited companies, whether they are referred to as "PSCs" or not, are unaffected by the new rules.

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