New Government Tax Regulations
People operating under umbrella or composite companies should be aware of important new tax regulations come into force on 6 April 2007. The March 2007 budget has introduced new regulations for contractors.
These regulations will affect you and how you operate through a service company. If you intend to continue providing services as an independent contractor then you need to take action to reduce your tax burden. Remember these rules are effective from 6 April 2007
If you intend to work through a limited company, it is possible that HMRC (previously the Inland Revenue) will check to see if you are working through what they now call a “Managed Service Company” (MSC) or a “Personal Service Company” (PSC).
For a company to be treated as a personal service company, the following should happen-
1. the shareholder should form a company and personally decide on the name of the company; who should be the director(s) and company secretary; how many shares should be issued and where the registered office should be (usually the home address of the shareholder)
2. the company should have a separate business bank account in the company’s name
3. the company should have a “contract for services” with the employment agency(s) that it chooses to work through, the contract should not go through a management company.
4. the money due to the Personal Service Company should be sent by the agency direct to the company’s bank account (not through an intermediary or management company)
5. the shareholder and director should decide how much of the gross income should be treated as salary (or directors fees) and how much declared as dividends. Whilst you may need advice on this matter it is the shareholders/directors decision
6. the director should approve and sign the annual accounts and other necessary documents
7. the company should have the necessary insurances in the company’s name
It is perfectly OK for you to appoint advisors to help you or to use a company formation agent, bookkeeper, accountant, etc.
The important aspect is control. You control the company, your contacts, your company bank accounts and how you get paid.
If you are currently with a managed service company (sometimes called an umbrella company or composite company) what should you do now? What are your options?
1. DO NOTHING AND REMAIN AN MSC
If you take no action at all, from 6th April, you can still continue to operate through a Managed Service Company, as they are not being banned as such, merely being made uneconomic from your point of view. However your income will now be subject to PAYE and National Insurance (both Employer’s and Employee’s) on the total amount. You will also only be able to claim those legitimate expenses that you would do if you were taxed as the employee of the agency (such as subsistence, overalls, laundry etc. NOT mileage allowances to and from your depot).
If you currently get a VAT rebate, this will continue, but the bottom line is that you will be worse off than going back to your agency on their payroll.
2. ASK YOUR AGENCY TO REGISTER YOU AS AN AGENCY EMPLOYEE
Your agency will tax all of your earnings as if you were an employee (i.e. PAYE and NIC on the full amount) and you will not qualify for most limited company expenses, such as mileage allowances.
3. START YOU OWN PERSONAL SERVICE COMPANY (PSC)
If you have full administrative and financial control over your company you will be no different from all the other limited companies that are essentially private service companies currently operating in every walk of life in the UK.
To do this simply follow these four points-
1. Find a company formation agent and instruct them to incorporate a new company on your behalf.
2. Find a book-keeper or accountant who will act on your behalf and perform whatever functions you instruct and offer advice on tax.
3. Find an insurance broker who will provide your new company with whatever insurances you either need (such as Employers and Public Liability insurance) or require personally (such as Personal Accident cover). This should be relatively inexpensive.
4. Open a company bank account at the bank of your choice.
If you need any further advice do not hesitate to call us.
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