keeping our contractors up to date with legal regulations from our legal advisors
16 April 2007
Update on Changes to law affecting contractors in the recent budget
Working as a contractor you are probably aware of a number of immediate and forthcoming changes to the law surrounding contract staff announced in the recent budget. The intent of the changes appears to be to ensure that contractors are paying the appropriate tax and national insurance contributions on their income, and that expenses claimed against tax are legitimate and reasonable. Indications are that the changes already announced may be the first of a series tackling all of the potential ways in which contractors operate, focussing on Managed Service Company (MSC Providers) arrangements for this stage at least.
MSC Providers are defined very widely, and are intended to include organisations providing services "influencing" the way in which payments are made to the contractor or the contractor company's activities. This might include any adviser, but the definition of MSC Providers given by HMRC provides some help by specifically excluding persons "merely …providing legal or accountancy services in a professional capacity".
PCR have obviously consulted with our legal advisors to understand the changes already implemented, so we can respond to any queries which our contractors may have on an informed basis. Although we cannot provide specific advice on individual circumstances, there are a number of key points we would recommend contractors be aware of to understand if their current arrangements might fall inside or outside of the legislation.
- from 6 April 2007it is intended that any limited company contractor who uses an MSC Provider will effectively have to be paid by their limited company on a PAYE basis, which may well result in a reduction in take-home income. This applies whether the limited company contractor is in a composite or a personal service company: the key factor is whether or not they use a MSC Provider. A number of press announcements from some of the major companies in this market appear to be clarifying which of their services fall inside or outside of the legislation and contractors should be clear on their own personal circumstances if currently using these companies services.
- For the time being umbrella companies are not affected by the legislation announced, so contractors who operate via umbrella companies (who apply PAYE and NICs to their umbrella contractors) may continue for the time being to receive a range of travel and subsistence expenses etc. free of tax. However as noted above HMRC do seem focussed on addressing the expenses issue, so it is not clear if this is a long term position.
- If a contractor has been operating through an “accounting services company”, key points to indicate whether this falls inside or outside of the legislation appear to be whether the company charges for work done on a fee basis rather than on a %age of contractor income, and also that the company does not exercise day to day control over the contractors finance.
The impact of the new legislation is still “under observation” and PCR will aim to keep contractors up to date as we receive additional advice from our legal advisors. We have also put together a series of short questions for contractors new to working with PCR which will help us and them understand if the new legislation might affect them and the company vehicles through which they operate.