Freelancers' tax scheme attacked
New rules to stop workers avoiding PAYE deductions by using managed service companies (MSCs) will be set out in the upcoming spring Budget.
The December 2006 Pre-Budget Report announced that MSCs will be required to deduct tax and national insurance from all payments to their workers from 2007/08.
MSCs, or composite companies, allow individuals to provide services without being taxed as employees. Workers hold shares in the MSCs and avoid national insurance contributions (NICs) by receiving most of their earnings in the form of dividends. The existing IR35 legislation on personal service companies does cover MSCs, but is difficult to enforce against them. The government estimates that around 150 companies are in the business of providing and managing MSCs.
The new rules will target MSC schemes by reference to four criteria, one of which is that the worker does not exercise financial and management control of the company. Crucially, HM Revenue & Customs (HMRC) will not have to show that the worker is engaged on terms similar to employment.
The legislation will also tackle the problem of enforcing payment – at present some MSCs, which have no assets, avoid tax by ceasing to trade as soon as they have established a tax debt. In such cases, HMRC will be able to make the MSC provider, or certain other third parties, pay.
The measures against MSCs are unlikely to be the end of the story of stopping NIC avoidance. The Pre-Budget Report also stated that the government remains concerned about self- employed people incorporating to save tax and national insurance, and is continuing to review the rules.