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Viewpoint: Composite companies fight back

There is still life in managed service companies, writes Alan Nolan

Composite providers are still an option

There is life yet in managed service companies, writes Alan Nolan

CONTRARY to what some may believe, managed service providers - widely recognised as composite providers - are alive and kicking despite HM Revenue and Customs' attempts to remove them.

For example, Gabem was refused the renewal of its CIS5 certificate last summer on the basis that it failed to satisfy two of the three tests necessary to achieve gross status.

Gabem sought an injunction against HM Revenue and Customs but failed in its appeal to the Special Commissioner. But this April Gabem re-applied under the new CIS, which required a 12-month compliance test for gross payment status, rather than the three-year test under the old scheme.

Following protracted negotiations, gross status was awarded as the business was deemed to be compliant.

The managed service company legislation, which came in to effect in April this year, has touched all service providers of labour and labour services.

Panic set in, with many end users withdrawing their support of such providers. Where a service provider is found wanting, under debt transfer HMRC has the power to seek additional liabilities from the end user, the personal service company and the individual.

The industry is in the process of self-regulation, fuelled by fear of hidden liabilities. Only those providers who can demonstrate full compliance with the legislation are able to survive.

The primary aim of the legislation was to remove the incentives of working through a 'managed' personal service company where an operative could structure remuneration by taking the national minimum wage as salary, maximising business related expenses and voting a dividend, thus reducing tax and National Insurance contributions.

This legislation seeks to tax all income under PAYE where it can be demonstrated that the personal service company is being 'managed' by a third party. The ability to claim expenses is restricted, so it has become less attractive to trade through such a structure.

But it is possible for an individual to trade through a personal service company and still remain outside the legislation. This will require developing bespoke advice tailored to individual circumstances following a critical assessment of individual needs and circumstances.

Many service providers have decided to walk away from operating service companies in favour of a new structure known as an 'umbrella'. This can take many forms and relies on obtaining dispensations from HMRC for qualifying business-related expenses.

The umbrella can be effective, albeit in a less tax efficient manner.

As part of HMRC's monitoring of the effects of the legislation, letters will be issued to those known service providers that HMRC believes are MSPs. The letters will ask such providers for limited information on their business models provided to clients and the numbers of clients within each business model.

HMRC has agreed to consider the possibility of structures, adopted by service providers, being audited by professional and experienced third-party advisers.

KPMG is in discussions with HMRC around this auditing process, which will go some way to creating a level playing field for the industry and allow the HMRC to concentrate on less scrupulous providers.

Construction businesses and agencies supplying labour to the construction sector should now critically assess the service providers which claim to be operating compliant models.

Alan Nolan is a director of People Services, based in London