The imminent death of temporary contracting as we know it?
Thu, Oct 18th, 2007
The MSC legislation will have a significant effect on the way the recruitment market operates, but largely because it will have a disproportionate effect on the relationship between agency and worker, argued John Chaplin and Sharon Boxall of KPMG at the October meeting of the Recruitment Society held at the Salisbury Square offices of KPMG. Agencies which specialise in tax and insurance avoidance will attract more interest from HMRC, and agencies are going to have to be doubly vigilant about the degree of control they exercise over people contracted to work through them, in order to avoid being caught up in the tax trap.
The attention of HMRC has been attracted by the complex relationship between Agencies, MSC providers, MSCs and workers and the potential for tax avoidance. This relationship has to be cleanly managed by the agency, in order to avoid disadvantage for the worker and additional costs for the client. The new legislation concerning MSC companies has arisen because of HMRC IR35 legislation on intermediate "umbrella companies" and the introduction of complex tax avoidance schemes which the Government are keen to eliminate. .
Under the terms of new legislation, MSC companies are expected to make PAYE and NIC payments to workers if they are in direct control of or "employ" workers. If unpaid, these liabilities can be transferred to other parties. However, a grey area exists where an MSC provider provides services to an MSC in the course of providing the services of a worker to a client. The focus of the new legislation is on the extent to which the MSC provider is "involved" with the MSC itself. The key element in judging whether there is involvement is the extent to which the MSC provider "controls" or just "influences" the MSC. An interesting analogy is whether the contracts all "Look the same" like a packet of Polo Mints or whether they vary depending on individual circumstances to meet specific short and long term needs of individual workers. And HMRC have identified a clear distinction between those providing legal and accountancy services in a professional capacity and those providing these services as part of other activities, in other words, it is not possible to avoid the tax by just notionally offering professional services.
The new legislation has a strong emphasis on transfer of debt. There are specific ways to avoid the transfer of debt legislation: • Don't be wilfully involved with the MSC • Don't deal with questions from work seekers on the tax • Use "Preferred Supplier Lists" so as to avoid "preferential treatment" • Review regularly the supply of labour and provide appropriate guidance to staff
There should be an arms length approach to issues relating to • Format of contracts • Payment arrangements • Payment rates • Invoicing arrangements • Terms under which individuals will work
Consideration should also be given to whether the service provider interposes themselves in any other way whatsoever between the individual/company and the recruitment business or the client, and the authority for any aspect of the company's trading/provision of the individual's services is in any way delegated to the service provider. HMRC will be attempting to establish an audit standard, the purpose of which will be to determine whether service providers fall within the MSC legislation. Those that do fall within the legislation will be entitled to some form of "umbrella" arrangement, whereby a worker will seek to maximise the tax free expenses they can pay under the authority of HMRC granted P11D dispensations, but guidelines in this area are not reliable and it is possible that HMRC will revoke the dispensations.
It will take at least two years to establish what constitutes a "compliant model", probably as a result of a court case. In the meantime KPMG advise the following top ten tips to reduce the risk for agencies:
1. Identify "MSC population" 2. Review of PSL 3. Make document enquiries 4. Consider if you still wish to contract in the same way 5. Consider involvement in the arrangements 6. Issue appropriate training to staff 7. Ongoing review 8. Watch for and prepare for possible audit 9. Consider whether individuals should be employed or self employed 10. DON'T BURY YOUR HEAD IN THE SAND!
