Engineering contractors across the UK have been reviewing their pay and accountancy arrangements to ensure they stay within the law since the definition of managed service companies (MSCs) was confirmed in the Budget announcement.
The Finance Bill, which is due to get Royal Assent next month, includes measures to tackle 'tax avoidance' schemes. Contractors will need to know if they can carry on using their existing accounting and payroll provider.
If you work through an umbrella company, or a structure where all income is taxed under PAYE, then the answer is yes, you can. The new law does not affect you.
If you think you are already using a personal service company (PSC), and you receive part of your income as a dividend, ask yourself the following questions:
- Are you the director of your company? Do you have a company bank account and are you the signatory?
- Do you control the way that money is drawn from the account and do you decide the amounts and timings of withdrawals?
- Does your service provider offer only accountancy and legal services?
If the answer is yes to all these questions, you are a PSC and are not caught under the new legislation. You are safe.
If the answer to any of the questions is no, you may fall foul of the law and want to seek advice about switching to another service provider. So it is worth looking in more detail at how service providers must operate to comply with the law.
Is my service provider 'a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals'? This is the first part of the Treasury's definition of an MSC scheme provider.
But the government does not intend to define everyone providing a service to contractors as an MSC scheme provider. In a recent parliamentary debate on the Bill, John Healey, financial secretary to the Treasury, said: 'Accountants, tax advisers, lawyers and company secretaries who provide advice or other professional services to companies and individual clients… are not in the business of promoting or facilitating the use of companies to provide the services of individuals'.
So it is acceptable for service providers to advise contractors about the best financial structure for their company. But there is a fine line between giving advice and promoting a tax-saving scheme. Healey said 'mass marketed schemes are almost always promoted on the basis that the worker will pay less tax'. He quoted websites of MSC providers whose stated aim was 'to increase the take-home pay of contractors'.
Accountancy service providers who continue to promote tax saving schemes on their website or in their marketing literature will attract the attention of the Treasury.
Is my accountancy service provider 'involved' with my company? Under the MSC legislation, a service provider is involved with a company if it 'influences or controls' the company's affairs. This could be widely interpreted by the courts but Healey said professional advisers are not regarded as 'involved' in the company.
So a service provider is 'involved' if it tells you as a contractor to take decisions in a certain way, or takes decisions on your behalf — but not if it advises you on the pros and cons of business decisions and lets you decide. You should still be in control of, for example, decisions on bank account withdrawals.
If you simply hand over responsibility for running your company to a third party, be it an accountant, lawyer or other service provider, you will fall foul of the law. But if you as a contractor seek advice on operating your business and act on that advice, you will be seen as running a PSC, which is allowed. So for example, you should still be the director of that company and remain the signatory on your bank account.
The legislation has not yet been finalised and could change in the final committee stages of parliament. PayStream will continue to review changes and provide further comment and advice once the final Bill is published.
However, we believe it will remain largely unchanged so if you are a contractor operating through a PSC, you need to make some key decisions now on sourcing support services.
Consider your own circumstances to ensure you comply with the law. It is no longer simply a question of allowing a service provider to dictate how you should operate. As sole director of the PSC, you must assume full responsibility for which service provider you engage to provide services.
Julian Ball is legal director ofPayStream
, provider of payroll, accounting and taxation services to PSCs