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New UK Service Provider Tax Rules Due To Hit In August

by Jason Gorringe,, London

09 July 2007

UK legislation to clamp down on 'Managed Service Companies' is due for Royal Assent in August this year and will subject all payments received by individuals providing their services through such organizations to PAYE and NI. All contractors who are found to be in breach of this legislation will face a gross bill to re-claim unpaid tax and NI, backdated to 6 April 2007, as well as a penalty fee.

Ethics and compliance specialists, Global Compliance Limited warn that soon, all third party organisations that employ contractors and MSCs will also be targeted, unless they take advice on how to comply now.

Director and founder of Global Compliance Limited, Sarah Morrissey said: “As of August 2007, new legislation will empower HM Revenue and Customs (HMRC) to claim unpaid NI contributions from contractors and MSCs, in addition to tax. From January 2008, in the instance that the debt cannot be recovered from the contractor or the MSC, HMRC will look to pass the debt on to their agency and then to their client. Recruitment agencies, the banking, finance, legal and IT sector and all businesses that employ contractors and MSCs, have only a few months to comply.

“I strongly advise businesses to educate themselves on this legislation, as it could potentially cost a lot more than money. Credibility and reputation within the industry would be at stake if a company is seen to be associated with a MSC in any way or from, particularly in the case of recruitment agencies.

“These illegal tax operations have cost the UK economy a huge amount of money and in order to put a fast stop to them, HMRC will be seeking to make an example of all who are found in breach of the legislation. Unpleasant investigations are likely to be made public.”

Global Compliance Limited are running a series of seminars throughout the UK to educate department heads and HR, finance and compliance directors on the upcoming changes, so they can protect their businesses against this transfer of debt.

The Professional Contractors Group (PCG), the freelance pressure group, has however reassured the UK's freelance community that ordinary limited companies are unaffected by the new tax rules.

"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 this approach will not work.

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.

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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