This year's pre-Budget report has seen the Chancellor of the Exchequer, Gordon Brown, get tough with hundreds of thousands of freelancers and contractors working under Composite or Managed Service Companies (MSC) schemes.
The consultation document entitled "Tackling Managed Service Companies" contains a number of new measures to close a £900million tax loophole, currently exploited by over 200,000 workers in the UK.
Managed Service Companies became a popular way for contactors to get around the IR35 legislation introduced in April 2000, allowing them to benefit from reduced tax liabilities and National Insurance Contributions. Under the proposed new legislation to come into effect from April 7th 2007, freelancers and contractors working through composite or MSCs will be subject to the same levels of tax and NICs as permanently employed PAYE workers.
Anyone operating under a composite or MSC should act quickly to set themselves up as either a Personal Service Company (PSC), or register to work through a PAYE umbrella company. Both of these look set to fall outside the Government's new legislation, and will ensure IR35 compliance.
For a full summary of the report "Tackling Managed Service Companies", download the Treasury's PDF guide here.