The Wardman Wire

I find myself surprised to write about the Budget - I had resolved not to do so.

However, I am directly affected by measures that no one seems to have noticed yet: dealing with “Tax Avoidance by means of Managed Service companies” (FT Article here).

IR35: A History Lesson

The use of Managed Service companies is one result of proposals introduced by Gordon Brown back in 2001 called IR35, which targetted freelancers working through one man limited companies via a very complex set of ambigous rules and tests. The upshot of that were hundreds of tax investigations and some legal actions (like this one). Assessment had to be done on a contract by contract basis, which complicates everything.

There have been some hundreds of investigations, of which the Inland Revenue have won a tiny proportion. The costs have been huge.

As a result there were far fewer contractors available; the uncertainty forced many thousands out of the industry. In turn customers - many of whom are government organisations with IT Projects in a mess - ended up paying a lot more money.

Measures in 2007: Tackling Managed Service Companies

For several years the Treasury has been working on proposals to attack Managed Service Companies. These have gone through virtually unchanged - hardly surprising- and come in from the start of the next financial year, i.e., in 2 weeks time.

There have been consequences already.

Playing Field no Longer Level

People working through a structure called “Umbrella Companies” - who are effectively full time employees for the duration of a short term contract and pay full National Insurance Contributions - will be unable to offset travel and accommodation against tax. They do this in order to increase efficiency and spend their time doing real work, and pay a full whack of taxes

So, if an engineer is based in Birmingham, and working for a client in Glasgow - the train fare and accommodation in Glasgow will have to be paid out of after tax income. Large companies, such as Accenture, will be able to offset these costs against tax

Therefore, freelancers will lose out against corporates by Gordon’s removal of a level playing field.

And of course, the corporates will charge £800 a day for work that freelancers will do to the same quality for £200 to £300.

Customers of Freelancers will Suffer

The people who suffer will be the customers of the freelancers. The customers of the freelancers are mainly public sector organisations struggling for staff. The extra charges that will be needed to cover the tax and administration involved will go from the public sector to the government, with added costs to pay for accoutants and time filling in forms.

One example: In the case of a contract I have just done for a public sector client at a relatively low daily rate (less than £300 a day) using the Umbrella Company setup, the extra cost to the client will be around £3000 per year. Nice one Gordon.

Back to Single Person Companies (Ho-hum)

Freelancers are being forced back into the single person service companies they were forced out of last time around, and this requires more burocracy and administration for those individuals, rather than time spent doing real work.

Since December 2006, when these proposals were announced, the rate of formation of limited companies has doubled rate.

Finally, a quote from the Institute of Directors :

The Institute of Directors also warned the Treasury about the risks of its proposed approach. “Many of the people who currently work through managed service companies will move to personal service companies, giving a much more diffuse target for HMRC to aim at.”

and another one from Christ Bryce, the Deputy Chairman of the Professional Contractors Group. This is the one that he really needs to pay attention to :

“The confusion surrounding self employed, contractors and freelance status is the single biggest obstacle to the highly skilled flexible workforce that Mr Brown has said the UK needs,” added Bryce

“Tax measures such as IR35 and the MSC rules arise from the confusion around employment status. With this clarified, the tax system can be simplified, starting with the repeal of IR35. PCG members are frustrated that the Government fails to grasp this and instead persists with such hopelessly complex tax measures.”

Coming soon: 5 Years of Legal Action

It is going to take 5 years of legal action and case law - that is how long it took to get some clarity on IR35 - at immense cost to all concerned.

Gordon Brown as been Chancellor for 10 years. He should have smelt the coffee, learnt from his experience first time round. He hasn’t learnt a thing. There is a chance that these proposals may still be amended, but I wouldn’t hold your breath.

Gordon Brown: What a TWAT to do this. What a steaming, incompetent, self-important, illogical, complacent, farcical Twat. And some people think he will make a good Prime Minister .

I am off to spend my time forming a Limited Company rather than doing productive work. That would be the one that the IR35 cockup forced me to close.

You have been warned.

Tags: Budget, Budget 2007, Gordon Brown, Tax Reform, Tax Avoidance, Managed Service Companies, Dawn Primarolo, Labour

[tags] Budget, Budget 2007, Gordon Brown, Tax Reform, Tax Avoidance, Managed Service Companies, Dawn Primarolo, Labour [/tags]