Self Employed Tax

New calculator clears up Budget tax worries for contractors.

Independent resource site www.ContractorCalculator.co.uk has launched a new 'calculator' tool - the Managed Service Company Legislation Calculator - to help UK contractors work out whether they will be affected by forthcoming changes to tax legislation announced in the Budget.

Although they may not come as a surprise to the tax savvy contractor, many lesser informed contractors could be dramatically affected without even being made aware of the effects of this new legislation.

"The recent attack on contractors by the Treasury will result in a huge loss of income for many contractors who do not prepare themselves for the impending changes in April," says Dave Chaplin, CEO of ContractorCalculator.co.uk

When contractors visit the calculator at ContractorCalculator's web site and enter their contract details they'll be able to find out straightaway if they are affected by the forthcoming legislation. This simple calculator will tell you if you are caught, what the financial impact will be, and what action you must take to avoid any reduction in pay.

In November 2006, Chancellor Gordon Brown announced that he intends to introduce landmark changes to tackle tax avoidance schemes offered to UK contractors through Managed Service Companies (MSCs).

The Inland Revenue's intention was to tackle tax and National Insurance (NIC) avoidance schemes through the use of intermediaries, such as Partnerships or Personal Services Companies (PSC). Contractors often use the Limited Company as a PSC to obtain work either direct from an end client or via an agency. The Revenue's view was that a large number of IT consultants, engineers, non-executive directors and 'one man band companies' were often treated as self-employed when in fact they should have been treated as employees of the end client.

This was based on theterms and conditions that the contractors worked under. The Revenue argued that if the agency or the PSC were removed, a large number of contractors would really be 'disguised employees' who should be included on the client payroll and have tax and NIC deducted each month. The Government announced the 'rule changes' which would take effect from 6th April 2000.

"The Revenue alleges in its Pre-Budget Report that many contractors are operating using composite company schemes via Managed Service Companies, even though their status was certainly one of being inside IR35," says ContractorCalculator's Chaplin. "They allege that many companies and contractors were ignoring the legislation. Since the Revenue could not effectively challenge all the cases, the new legislation is intended to remove the issue by forcing all MSC contractors to pay tax as though they were an employee of their client. Those contractors genuinely outside IR35 are expected to form their own limited companies, whilst those caught by IR35 will need to transfer to a simple PAYE type umbrella where all income is fully taxed."

A Managed Service Company, in the context of the definitions defined in the December 2006 Pre-Budget Report, refers to a service company that provides contractors with a composite company solution to manage their invoicing and accounting.

In a composite company scheme, typically up to 20 contractors become non-director shareholders and the scheme provider manages the company. The contractors are then paid a low salary plus dividends in addition to claiming various expenses allowable under the corporate structure. This method of payment provides many financial benefits, since it avoids large amounts of National Insurance and income tax that would otherwise be payable if the contractor was paid entirely by salary. However, for a contractor to use a composite scheme they must lie outside IR35 legislation.

Announced in 1999, 'IR35' is a piece of tax legislation which allows the Inland Revenue to tax some contractors as though they are employees of their clients. Contractors caught by IR35 pay significantly more tax, reducing their take home pay by up to 25 percent.

Privately owned and run by a team of existing and former contractors, ContractorCalculator is an independent internet resource for UK contractors. Its range of calculators for contractors and permanent employees can be used for a variety of tasks from calculating taxes and net pay through to comparing contract rates and effects of IR35. In addition to the impartial calculators it contains the most extensive knowledge base of information for first time and existing contractors, providing a 'one-stop-shop'.

More information can be found at: at: www.contractorcalculator.co.uk

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