Pre-Budget Report - Managed Service and Composite Companies

The Chancellor’s proposals to remove the tax advantage offered by composite and managed service companies is the big story for freelancers and contractors in the Pre-Budget Report. The Professional Contractors Group (PCG) has said it has no objection to the proposals in principle.

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Extract from Pre-Budget Report (Managed Service Company Schemes)

"The Government is taking action to tackle Managed Service Company (MSC) schemes which are used to avoid paying employed levels of tax and NICs. Income received by workers in MSCs in relation to services provided through the MSC will be subject to employed levels of tax and NICs, with the MSC obliged to operate Pay As You Earn (PAYE) and deduct tax and Class 1 NICs on that income - and the rules for tax relief for travel expenses will be the same as for other employed workers. The Government will also address the problem of MSCs escaping payment of tax and NICs due by allowing the recovery of these debts from appropriate third parties.

This will protect the Exchequer and ensure a level playing field for compliant businesses and workers. The Intermediaries legislation will remain in place for Personal Service Companies.

The Government is consulting on the draft legislation to implement this measure. The draft legislation and questions for consultation are set out in the consultation document Tackling Managed Service Companies, published alongside the Pre-Budget Report today."

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"It’s the Chancellor’s prerogative to suggest reforms that remove opportunities for tax avoidance that offer an unfair advantage," commented PCG’s chairman David Ramsden. "We would agree that workers using composite and other forms of managed service company do gain a tax advantage when compared to contractors who take on the full responsibilities of being in business, such as by using bona fide limited companies. However, it’s legitimate that contractors should seek to plan to reduce their tax bills by legal means."

PCG has long been critical of the use of terms such as "non-compliance" to erode the distinction between evasion and avoidance. Managed service companies’ arrangements currently constitute avoidance and are therefore currently legal; PCG welcomes the direct approach taken here of introducing changes via statute.

"It is crucial that the scope of this measure is defined to include managed service companies but not freelancers and contractors who are genuinely in business," continued Mr Ramsden. "We would of course not welcome an additional tax burden on the latter group. Our preliminary reading of these proposals suggests that they are sound in this respect."

PCG advises people thinking about going freelance that they should always do so within the law and get expert advice.

• Also read our article - The Death of Composite Companies?
• Our sister site, Contract Eye, has further resources relating to the Pre-Budget announcement on Managed Service Companies.