Freelance freedom to work in construction

Under new tax law freelance professionals gain freedom to work in construction.

Some sectors in the construction industry have been severely affected by the clamp down on managed service companies, or composites as they are commonly known.

This article explains what went wrong, and how people can recognise a managed service company to avoid being caught by the new legislation.

The Managed Service Company (MSC) legislation targets workers who have been paid as shareholders of a company over which they have no financial control, and who were paid expenses and dividends rather than an employment income.

Trying to side step the issue, composite companies then tried to set these workers up in their own limited companies, but Gordon Brown quickly clamped down on this practise in the March 2007 budget.

The good news is that the tax experts at Construction Works have successfully obtained employment status rulings from HM Revenue and Customs for people working on a genuine freelance basis in trades which are outside the scope of CIS, e.g Engineers, Contract Managers, Surveyors and Draughtsmen.

These rulings mean that contractors can safely pay these professionals whether they operate through a limited company or not.

The removal of managed service companies will give many individuals the freedom to work in the construction industry without paying huge fees to composite companies, and without any tax liability falling on the companies which use their services.

This issue affects workers both inside and outside the scope of CIS, and there follows a summary of the new legislation, Chapter 9 Income Tax (Earnings and Pensions) Act 2003 which was enacted on 6th April 2007 which has become known as the MSC legislation.

The summary also outlines the potential effect on a number of scenarios relating to individuals working in the construction industry.

A company is a Managed Service Company (MSC) if it acts a labour supply company and is involved labour supply, but the amount paid to the individual is more or less equal to the amount it receives in respect of supplying that labour.

Example 1.

A labour supply company charges a client a rate for the labour element and negotiates a day rate with its subcontractors, the difference forming the labour supply company's profit margin.

This labour supply company is not an MSC Example 2.

A labour supply company invoices the client for the amount it pays over to the individual and benefits financially by way of a service charge being made to the individual.

This labour supply company may be an MSC.

For a Managed Service Company to exist there must be a Managed Service Company Provider (MSCP) which carries on the business of promoting or facilitating the use of companies to provide the services of individuals.

Example 1.

An accountancy practise promotes a service under which all users gain a tax advantage by incorporating, it is also involved in or influences the way in which payments are made to the individuals' limited companies.

When an accountancy practise is promoted by an employment business, the employment business facilitates the accountancy practise in its operations by paying individuals according to the conditions laid down by that practise.

This accountancy practise is deemed to be an MSCP and any person or business that promotes or facilitates provision of the services of a MSCP is deemed to be its associate.

Example 2.

An accountancy practise is involved in providing legal and accountancy services.

The accountancy practise may advise that there is a tax advantage in incorporating based on the individual's circumstances.

The accountancy practise is not involved in the way in which the individual is paid; neither does it control the individual's activities or finances.

This accountancy practise is excluded from the MSC legislation.

A Service Provider which is carrying on a business consisting only of placing individuals with persons who wish to obtain their services, including contracting with companies which provide their services, is not necessarily an MSC provider (MSCP).

Example 1.

A Service Provider which facilitates the provision of the services of individuals e.g sub-contractors who may or may not be trading as limited companies, is not caught by MSC legislation unless it is doing anything within any of the paragraphs under section 61B (c) to (e) of chapter 9 ITEPA 2003, but is caught by CIS legislation if the individual is identified as an employed earner.

Example 2.

An employment business which facilitates the provision of this service by paying individuals through a service provider is not caught by MSC or CIS legislation, unless the service provider doing anything within any of the paragraphs under section 61B (c) to (e) of chapter 9 ITEPA 2003.

Extract Chapter 9 ITEPA 2003.

61B(2) (c) influences or controls the way in which payments to the individual are made.

61B(2) (d) influences or controls the company's finances or any of its activities.

61B(2) (e) gives or promotes an undertaking to make good any tax losses.

Summary.

New legislation places a huge administrative burden on contractors and to avoid it, some may decide to pay workers through a payment service provider.

If the service provider is genuine and operating compliantly, this helps not only the contractor and subcontractor but also reduces administration on HM Revenue and Customs.

Complaint providers have been specifically excluded from the legislation, but recognising a non-compliant company masquerading as a compliant provider is difficult, and if a contractor is paying individuals through a non complaint provider which goes out of business to avoid paying any tax debt, this liability will pass to the contractor without any prior warning from the Revenue.

Remember:.

* Any company that promises to keep all subcontractors self-employed and promises to cover tax losses can not be a compliant service provider.

* Any contractor that expects workers to be paid through an external company to avoid paying under new CIS, may become liable for that company's tax debts.

* Contractors must be sure that any company which pays a worker on their behalf is correctly assessing employment status to avoid the transference of any tax liability.

Please call us for free confidential advice on issues relating to paying labour or being paid in the construction industry, our aim is to advance employment strategy to create a better future in the construction industry.

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