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Contractors cop the costs!

It was only a matter of time before HMRC [1] launched an all out attack under the Managed Service Companies legislation – it would now seem that time is up! Some of the big providers have already fallen and the rest will soon come under fire.

The number of enquiries into providers has more than tripled in the last month, and I am reliably informed by my source within HMRC specialist unit that we can expect to see much more HMRC activity in the coming months.

The problem for limited company contractors

What many providers fail to warn contractors is, if they set you up with a limited company, administer the limited company for you, have involvement in your company’s activities or dictate your salary, expenses and dividend levels it is likely your company is a managed service company and your company is liable. It does not matter if the provider was based offshore or not (and in all likelihood the provider will have gone into liquidation anyway so HMRC have no hope of recovering money).

HMRC’s first port of call is the managed service company [2] – this is your company. If the company is unable to pay the debt the next party in line, under the transfer of debt rules, is the director of the limited company – you personally.

A common misconception across the board is that if the third party administering the limited company is an accountancy practice then the Managed Service Companies rules do not apply – this is a fallacy there is no outright exemption for accountancy practices.

If you have already received a letter from HMRC’s or you are currently operating through a limited company where a third party has more say over your company’s finances or activities than you do then you need to act now – get advice from an expert [3], do not rely on your provider!

Any problems for non-limited company contractors?

While umbrella workers and those working through a self-employed model may not be directly in the line of fire under the managed service companies legislation they must remember that they themselves are personally liable for their own tax affairs (even if they provide their services through an offshore provider [4]).

If your umbrella company [5] is processing expenses you have not incurred – you are liable for the unpaid tax, not the umbrella company.

If your self-employed CIS company is not deducting CIS tax when it should, or encouraging you to claim expenses you are not entitled to you are liable for the unpaid tax.

Are any safe?

Not every provider is operating incorrectly but many are and, despite any assurances to the contrary, contractors are in the frame for the unpaid tax. Investigate, investigate, investigate! Do not simply take assurances that providers have counsel’s opinion or that they have been approved – this counts for nothing when HMRC come knocking on your door.

Ask for explanations on every document you are give, ask to see copies of the tax advice received and talk to other contractors about their experiences – at the end of the day if it looks like a tax avoidance scheme, it probably is; if it looks too good to be true – it probably is!

David Harmer is the Operations Director of Accountax Consulting
© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Attack of the Toutous [6] by skippyjon

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