Budget (4): Managed service company review
The Chancellor issued a warning to small businesses who 'incorporate in order to avoid tax' and announced that it will 'consult on action to tackle disguised employment through managed service company schemes.'
As is often the case, the detail is contained in a weighty document released after the Budget. In a 300 page report, Chapter 5 deals with 'Building a Fairer Society' and three paragraphs in that chapter show that the Chancellor still intends to deal with what he perceives as 'disguised employees' with the spotlight first falling on 'managed service company schemes'.
Tax motivated incorporation
Paragraphs 5.84 to 5.86 say:
5.84 In the Pre-Budget Report the Government responded to increased tax-motivated incorporation by simplifying the corporation tax system with a new single small companies' rate of 19 per cent. It also announced that it would continue to review the tax and national insurance contributions (NICs) systems. Responses to the Pre-Budget Report indicated that business generally welcomed the single small companies' rate but wanted the Government to go further in simplifying the corporate tax system.
5.85 Since the Pre-Budget Report, further evidence has emerged that employment income is being disguised as dividends in order to take advantage of the small companies' tax rate, often encouraged by promoters of mass-marketed managed service company schemes. There is also evidence of some agencies, contractors and employers requiring workers to use corporate structures, thereby denying them employment rights as well as avoiding paying their fair share of tax and NICs.
5.86 The Government believes that all individuals and businesses must pay their fair share of NICs and tax, irrespective of legal form. It will continue to review the tax and NICs systems to ensure that this is the case and will bring forward proposals for discussion that are consistent with simplicity for compliant businesses, support for businesses in their aspirations to grow and maintaining the attractiveness of the UK as a business location. As the first stage of this review the Government will consult on action to tackle disguised employment through managed service company schemes.
Cautious welcome
The Professional Contractors Group (PCG) has 'cautiously welcomed' the announcement of a review of the tax and national insurance regime, as it pertains to freelancers.
PCG chairman Simon Juden said: "This offers a clear opportunity to address the unfair and inconsistent intermediaries legislation, known as IR35, as well as the enormous complexity of the taxation of freelance consultants and contractors.
"We look forward to engaging positively with Government on these issues, as we have long campaigned for consistency, clarity and common sense in the taxation of freelancers.
"We also welcome, in principle, discussions about aligning the income tax and national insurance systems. This represents an opportunity to remove distinctions which are meaningless in practice."
PCG agreed with the Chancellor that all individuals and businesses must pay their fair share of NICs and tax, irrespective of legal form. While the Chancellor's renewed efforts to curb tax avoidance are understandable, PCG said that the Government should focus further on evasion and not confuse the two.