This year's budget delivered a timely wakeup call for hundreds of thousands of freelancers and contractors throughout the UK.
Top of Gordon Brown's 10th Budget black list is the Composite or Managed Service Company (MSC). Since 6th December's Treasury report entitled "Tackling Managed Service Companies", MSCs, freelancers and contractors have been waiting for this year's budget report to hear how the Treasury planned to close what it saw as a £900million tax loophole. The new Intermediaries legislation provides the answers.
The pre-Budget report fingered MSCs as "mass market tax and NIC avoidance schemes". In the Treasury's eyes MSCs have enabled contractors and freelancers to circumvent regular taxation - and in particular IR35 legislation - by allowing them to pay themselves via dividends.
A large number of freelancers and contractors working for Managed Service Companies have until now been treated as self-employed, while the Treasury feel they are actually employees of the end client.
Although the clampdown won't come as a big surprise to many, some 200,000 freelancers and contractors are currently working under MSCs or composites companies in the UK alone. All face the wrath of the Treasury unless they get themselves in order by 6th April of this year. Those found to be still working under Managed Service Companies after this time 6th April should be prepared to have full PAYE applied to their earnings.
Freelancers using their own Personal Service Companies operating inside of IR35 are clearly not affected by the new laws, nor are IR35 compliant umbrella companies (based on PAYE and not dividends).
In short, you're safe and fully compliant if you're already using either a genuine limited company or a high quality PAYE umbrella. If not, it's time to get your skates on.