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Managed Service Company to Umbrella Company Conversion
Due to recent legislation changes, many contractors are looking to convert from an MSC Provider to an Umbrella Company.
Parasol Ltd are experts in this type of service provision and have been offering compliant PAYE umbrella services for over 7 years.
They have published the following guide to assist freelance workers in better understanding the current contracting landscape and to help them feel reassured that their pay and employment arrangements are being competently handled.
For further information about Parasol Ltd and its range of services, please contact our enquiry team on 0800 583 6000 or email enquiry@parasolgroup.co.uk
Background to the legislation
On Wednesday 6th December 2006, the Chancellor unveiled draft legislation entitled "Tackling Managed Service Companies". For some time, HMRC had been looking at ways to increase the amount of tax paid and believed that the use of composite companies or single person service companies run by a dedicated scheme provider to be a tax avoidance route.
A "worker" would typically be paid a low salary and then receive weekly or monthly dividends and expenses. This would in some cases mean that a contractor would secure a return of up to 85% and often the "schemes" would be backed by so called, IR35 "insurance".
On 6th February 2007, HMRC published more specific details on how it intended to make recruitment agencies potentially liable for the unpaid tax and NIC of limited company contractors through its proposed "debt transfer" provision.
Finally the Budget itself, delivered on 26th March 2007 saw the Treasury introduce further measures that cut even deeper than originally envisaged. Not only did the Chancellor retain the proposals that he had laid out in his Pre Budget Report, he amended the definition of "control" to a much wider one, so that any service provider offering the creation and administration of personal company structures would also be caught.
The result has been worry, confusion and misinformation combined with a very real concern that recruiters could find themselves at real risk of commercial losses as this untested legislation moved closer to the statute book.
What is a Managed Service Company/Managed Service Company Provider?
The definition of a Managed Service Company applies to Limited Company structures created for a small group of workers, where the income they receive attracts less tax than if they were employed (usually in the form of dividend payments) and whose company structure is provided by an "MSC Provider"
A Managed Service Company Provider is an organisation that creates and facilitates the running of small companies (on behalf of freelance workers).
It is the formation and rapid growth of these organisations that has concerned HMRC, since they facilitate situations that enable workers to claim self employed levels of remuneration (often in the form of dividends).
Crucially, since these MSCP's are offering far more than an administrative support service to freelance workers (to the extent that they are actively taking decisions that affect the running of the company) they are (viewed as) breaching self employment legislation (IR35) and consequently guilty of tax evasion.
How do I know if I am I using a MSCP?
Many former scheme providers, caught by the legislation introduced in March 2007, have re-invented themselves as full service accountancy firms as they believe that this constitutes a viable way of avoiding the legislation.
Further some have actively done this so that they can market their services as offering a facility to create Personal Service companies (which for those who fall outside of IR35 still permits the worker to receive income in the form of dividends).
However the key question remains: How would a contractor know if their service provider is a Managed Service Company Provider? According to the legislation there are five tests that define whether an "MSC Provider" exists and of these, only one has to apply in order for the legislation to apply as a whole.
a) Benefits financially on an ongoing basis from the provision of the services of the individual
Does scheme provider receive a percentage fee of the income of the Managed Service Company or individual or receive a fee when the worker provides services but conversely does not receive a fee when the worker does not provide services
b) Influences or controls the provision of those services
Does the Scheme Provider arrange the contracts for service between themselves and the staffing company or end client? Are they involved with the arrangement of the contracts for service, the negotiation of rates and/or terms of the contract? Are they involved in ensuring the freelancer attends the worksite or is obliged to enter into any dispute resolution?
c) Influences or controls the way, in which payments to the individual (or associates of the individual) are made
Does the Scheme Provider have control over the managed service company's bank account or access to it, or makes any payments on its behalf. Further does it calculate salary, dividends and/or expenses from the income of the MSC, and instruct the freelancer on how to remunerate themselves from company funds.
d) Influences or controls the company's finances or any of its activities
Does the scheme provider calculate how much a freelancer has earned from an invoice, and instructs the freelancer on how much to pay themselves from their company.
e) Gives or promotes an undertaking to make good any tax loss
Does the Scheme Provider promote or introduce workers and/or their company, to an insurance scheme, guarantee or any form of protection against consequential loss arising from underpayment of tax which results in the freelancer being challenged successfully by HMRC. e.g. IR35, VAT and PAYE insurance.
What is a PAYE Umbrella?
A PAYE Umbrella serves a similar function to Managed Service Companies but differs hugely in its structure, service offering and (significantly) its level of legal compliance.
The complexity of the service on offer differs widely with some PAYE structures offering a straightforward payments allocation service to workers bank accounts whereas others have created a far more in-depth service covering important areas as employment contracts, extendable HR functions, comprehensive insurances and employment rights.
Furthermore, many structures have developed highly integrated technology solutions that permit scaleable processes and the efficient exchange of contract and payments data, leading to increased cost and time efficiencies.
Umbrella services were specifically excluded from the recent Managed Services Companies legislation, primarily as they deduct all Tax/NI contributions at source.
They also offer a commonsense approach to the need for a trading structure when a worker does not pass IR35 self employment tests and/or is simply keen to avoid the hassle of incorporating and the ongoing director's responsibilities.
(So called) compliant umbrella services have also come under scrutiny in the recent times since, despite offering their services as a PAYE service, they have failed (in the eyes of HMRC) in a couple of key areas.
- Expenses - many have continued to inflate the promised returns to freelance workers by abusing the benefits of a dispensation arrangement. A dispensation is simply a way of reducing paperwork and relieves the employer (the umbrella) from having to complete P11D or P9D's. It can further simplify the process for employees as they do not have to include details of the expenses and benefits covered by the dispensation in their tax returns. Unfortunately rogue operators have abused this and promoted high returns by applying the available tax relief erroneously or worse still, fraudulently
- Employment rights - many PAYE schemes have not offered their workers a permanent arrangement which wholly satisfies the requirements of UK employment law. Worse still the HMRC has viewed some structures as being a "forced arrangement" whereby the worker (with often little or no choice) is pushed into a non compliant structure to suit the agency or end client. Many offer "pseudo-employment" agreements that fail to offer full employment status, zero hours (when outside contracted assignments) and little or no entitlement to any employment rights.
What makes the Parasol unique?
Parasol has built its reputation on the foundations of a strong brand and a service delivery ethic with both the workers and their recruitment agencies, which has been developed and refined since the inception of the company.
By offering a clear indication of how and what we do, Parasol believes that the partnership that it forges with the market will develop and strengthen.
Furthermore the company understands that the freelance worker prefers to work with organisations that truly understand their chosen market and respond with a relevant and flexible offering. In addition, making the overall process swift, intuitive and straightforward will ensure that freelance workers can complete their administration with the minimum of fuss.
In terms of compliance:
- Parasol is more than simply an "umbrella company" - it provides professional employment solutions for contractors.
- All contractor workers receive a guaranteed hour's employment contract in order that they can enjoy the reality of an employer/employee relationship and the protection and security it brings.
- We will handle the vast majority of HR related matters (should they arise), e.g. grievance, disciplinary, tribunal claims and much more.
- Statutory payments (PAYE, NIC's) are all processed by Parasol and all statutory notifications (P45's, P60's, etc.) are issued automatically.
- Genuine business expenses are allowed to responsibly maximise any permissible tax relief.
- We offer contractors career development through our training and skills solutions, thereby investing and adding value to them during their employment with Parasol.
- We provide an inclusive insurance cover package of £21m cover (£6m PI, £10m EL, £5mPL) to ensure that all workers are comprehensively covered.
Relating to service the following is included as standard:
- Fully interactive web portal for workers to manage their contract assignments, invoices, payments and expenses
- Managed, online registration process to ensure that workers can be activated instantly
- Online calculator facility to project instant calculations of "take home" pay
- Consultant Support Team operating extended hours to promptly resolve or escalate any queries arising
- Competitive and fully inclusive administration fees (£25.95/week) with no additional or hidden charges
- SMS notifications at key process points
- Free financial advice and numerous affiliate offers
For further information about Parasol Ltd and its range of services, please contact our enquiry team on 0800 583 6000 or email enquiry@parasolgroup.co.uk
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