The introduction of the Managed Service Company (MSC) legislation from April 2007 had a significant impact on the contracting industry. In this article, we explain why the safest way to work is with PayStream’s support and expert advice.  

Overview

The introduction of the Managed Service Company (MSC) legislation from April 2007 meant that service providers running MSC models such as composites needed to find an alternative solution (and quickly) for their contractors. For many, the simplest solution was to transfer the contractors to an umbrella. The difficultly for the service providers was persuading contractors that this was a good idea particularly since contractors were likely to see their take home pay go down. Many providers therefore marketed umbrellas as the only compliant option. Many agencies supported this stance because they were afraid of debt transfer.

Having persuaded contractors to move to umbrellas the next problem for these service providers was to deal with the fact that take home pay was reduced (versus a composite or MPSC). Some providers had negotiated generous dispensations with HMRC which they advertised as a way to increase take home pay; unfortunately even though HMRC had approved the dispensations it was not impressed with this approach. HMRC also believe that some umbrellas encouraged contractors to make claims for expenses not actually incurred. HMT and HMRC therefore decided to take action to tackle this “non-compliance” and contractors are now faced with a situation where the Government is considering removing the right for umbrella workers to offset travel to work and subsistence expenses altogether. Whatever the outcome of the legislation this is probably the right time for contractors to reassess their working arrangements.

Where now?

Now that the dust has settled on the MSC legislation the industry as a whole has accepted that working through a PSC is perfectly legitimate. Essentially this means that if you are controlling your own work and capable of managing your own affairs, especially your finances then you should consider whether a PSC is right for you.  

The first question you should ask is “do I want to run my own company?” You will be a director and be responsible for managing your company’s bank account and making payments to HMRC. You can get an accountant or service provider to do all the paperwork for you but ultimately it is your responsibility to manage the company’s finances. If you are happy to do this then there are distinct financial benefits for you. Typically, a limited company worker takes home 80-85% of the gross income received whereas an umbrella worker takes 65-70% of the gross.  

The second question you should ask is “is there anything preventing me from running my own company?” If you have recently been made bankrupt or have a poor credit history you may experience problems opening a company bank account. If you are in the UK on a VISA there may be restrictions on you becoming a director of a company. These are questions you should raise with your service provider. If your service provider only has an umbrella product you may need to seek advice elsewhere to a service provider, such as PayStream that offers a variety of services.

IR35 remains crucial. The third question you should ask yourself is “am I caught by IR35?” At PayStream, we will be able to help you with this question and since we offer both umbrella and PSC services you won’t find yourself pushed towards an option which suits the service provider rather than you. Tailored advice is critical.

Generally speaking the more differences between your working arrangements and those of the employees on site the better from an IR35 perspective. If someone looking from the outside cannot distinguish between you and an employee you are probably caught. The questions below are usually asked by HMRC in determining whether you are caught by IR35. The more “yes” answers you give the better for you from an IR35 perspective:

1. Could you send someone else to carry out all or part of your work under the contract?

2. Are your hours flexible and different from the employees?

3. Can you do some of your work from home?

4. Is it up to you how the work is carried out?

5. Do you decide whether to accept work offered by the client?

6. Do you take financial risk in running your business eg is there a chance of not getting paid if you do a bad job?

Obviously every contractor wants to take home more money and working through a PSC allows you to do this. But you need to weigh up whether the extra work you will need to carry out is worth the extra money and whether there is an IR35 risk for you.

So our advice is:

• don't get pushed into an umbrella or a PSC
• seek tailored advice on your individual circumstances
• make an informed decision and understand the risks

Throughout the MSC consultation and implementation, PayStream provided support to its PSC contractors and ensured they worked compliantly with the new legislation. With our customers in mind, we didn’t just take the simple solution. We will take the exact same approach with the expenses consultation. Since PayStream offers a range of services both inside and outside IR35, we can offer you impartial and tailored advice. For more information about our services, contact our New Business team on 0800 197 6516.