Her assessment of the growing demand for skilled workers to fill finance and accounting jobs has been backed up by a recent report carried out by the Future Foundation and Friends Provident. Their Visions of Britain 2020 research has forecast that this decade will see people in elite jobs - professional, managerial and technical - gaining more power in the workplace. The authors of the report stated that this is because organisations are likely to face shortages in the number of well-qualified workers.

Here at Poolia we endeavour to source the best candidates for every role we recruit for. We understand the value of finding the right set of skills and the most relevant experience when looking for candidates but it is our ongoing relationship with our candidates that ensures we find a personality and culture match for them every time. Whether you are looking for a new exciting opportunity or are looking to move from your current role, contact Poolia today and let us help you take your career to the next level.

New rules on employment rights for temp workers is good news for Limited company contractors and bad news for umbrella company contractors and agency temp workers

The new rules, called the Agency Workers Directive (AWD), mean that agency temporary workers and umbrella company contractors will basically be given the same employment rights as permanent employees.

The rules come into force in 2011 but this is not necessarily good news for contractors and temp workers who, in reality, often sacrifice employment rights for higher pay rates which are likely to drop if recruitment agencies are forced to pay for employment rights.

Umbrella company workers will also be included in the legislation and the same principal may apply where umbrella company providers may have to raise fees to deal with increased costs of compliance with the AWD. The net result is that the costs of implementing this legislation gets passed on to the contractor.

The great news is that Limited company workers are outside of these laws and can operate as they currently do. In fact recruitment agencies are now more likely to be more co-operative in assisting contractors who want to be self-employed, which will help contractors stay outside IR35.

Contractors should prepare for the introduction of the AWD by contracting through a limited company. Even if you are caught by IR35 you are likely to earn more than using a regular umbrella company or being pay rolled through an agency.

The judge found that one of the primary factors against the contractors’ case was the lack of commercial reason for their arrangements other than to avoid tax. The case was brought by HMRC after a law called Budget Note 66 (BN66) was introduced in 2008 to tackle tax avoidance by offshore schemes. The fact that contractors have to pay tax retrospectively from 2002 until the law was introduced has prompted anger and controversy.

Roger Sinclair of the legal firm, Egos, pointed out “This case does rather illustrate the dangers of using tax avoidance schemes which rely on artificial arrangements, where the arrangements lack any apparent commercial purpose, beyond the reduction of the tax bill.”

John Whiting, of the Chartered Institute of Taxation mentioned: “I think all tax practitioners will worry a bit about this judgment if it is seen as opening the door to retrospection.

The main lesson to take from this ruling is not to dabble in offshore avoidance structures if you are resident and working in the UK. The safest and legal method of maximizing your income is through a Limited Company.

With elections looming and everybody writing off the labour government, which way will the owners of small businesses vote? If you asked a labour spokesperson, they would undoubtedly spew out statistics about reductions of small business administration, the record number of company incorporations during their reign and efficiencies achieved at Companies House. However, an analysis of labour’s track record suggests they won’t win over small business.

The make up of the small business community

To understand Labour’s thinking on forming policy for small business, it is necessary to understand the makeup of the small business community. In 2003 there were 4 million small businesses defined as any business with less than 50 employees. Of these 95% had less than 10 employees and were defined as micro-businesses.

The majority of small and medium business will trade as a limited company whilst the types of micro-businesses can be further distinguished as sole traders and contractors or personal service companies.

Sole Traders
Many micro-businesses register as self-employed and trade as a sole trader because it has less complexity and administration than starting a limited company. Sole traders are typically small retailers, contractors in the trade, part time businesses and start-ups.

Contractors and Limited Companies
A large number of micro businesses provide personal consulting services and operate alone as one-person limited companies or as two-person limited companies in partnership with wives or husbands. This is a common way that small businesses are born, with individuals contracting their personal services with a limited company as the preferred choice for trading because of its tax efficiency. Such companies have come to be known as personal service companies or PSCs.

Labour’s small business issues

The most common complaint small businesses expounded when Labour took charge were the complex and heavy tax burdens and the pain of unnecessary red tape or administration that discouraged businesses to take on staff, and encouraged them to operate in the informal economy on a cash basis.

Another problem looming for Labour was a growth in PSCs being used by employees to reduce their tax by avoiding the PAYE system. Many companies providing services to contractors had emerged that encouraged PAYE employees to operate as a limited company. These service providers had become adept at mass processing a contractor’s income through a limited company as a shareholder, thereby making it easy for anyone to operate as a limited company and reduce their tax. This arrangement suited employers who technically did not employ their workers and had no statutory obligations to them. It was also aided and encouraged by recruitment agencies that were able to reduce their administration and employment responsibilities and offer better return for their contractors.

Abolition of Advanced Corporation Tax

Faced with these issues and the beginning of the boom time, in April 1997, Gordon Brown began by reducing corporation tax from 23% to 21%. In 1999 he abolished advanced corporation tax payments which meant that businesses no longer had to prepare accounts every quarter and calculate and make advanced payment of corporation tax to the HMRC or Inland Revenue as it was then named. This was a good start, reducing the administration burden of small businesses for preparing accounts from four times a year to once a year and greatly assisting small business cash flow. It also reduced a large administrative burden on the Inland Revenue.

Corporation tax tinkering and the introduction of IR35

In April 2000 a 10% tax band was introduced on company profits between £0 and £10k. This was tapered out over profits between £10k and £50k and therefore only benefitted companies with low turnover viz. micro-businesses.

In the same budget, the introduction of IR35 was announced. The aim of this legislation was to curb the use of personal service companies (PSCs) and stop disguised employees from incorporating and avoiding tax. The legislation was complex and poorly conceived which created uncertainty in the contractor market because the line between a genuine, self-employed contractor and an employee was not made clear.

It is significant that the introduction of this legislation was timed in conjunction with the decrease in corporation tax for micro-business. The government probably believed that the introduction of IR35 would stop disguised employees taking advantage of an even lower rate of corporation tax.

It is also likely that the government believed that the reduced corporation tax rate for low-profit businesses might even increase tax revenues by encouraging people out of the informal economy and onto the radar of the treasury. In 2002 the 10% rate was further reduced to 0%.

The results were a spectacular failure. Sole traders, were now incentivised to incorporate as a limited company to reduce their tax. IR35 was too complex to enforce effectively and the contractor industry merely changed the terms and conditions of employment contracts to keep contractors out of the legislation. The lower rate of tax served to encourage even lower earners such as receptionists and admin staff to incorporate and the contractor service provider companies just got stronger. The net result was a large loss in tax revenue for the government from the mass incorporations of sole traders and contractors.

Rethinking the nil rate of corporation tax

Instead of admitting it had made a mistake, Labour reacted angrily to the mass incorporation of companies between 2000 and 2004 complaining bitterly and perhaps, naively, that businesses should not incorporate for taxation reasons as opposed to commercial reasons. In 2005 they then introduced new legislation called IR591 that effectively nullified the 0% corporation tax band if dividends were distributed. They argued that this would achieve their aim of encouraging small businesses to reinvest their profits in their business and hence incorporate for commercial not tax reasons.

The calculation of corporation tax then became extremely complex. Thousands of hours were lost on accountants, the HMRC and business owners trying to variously figure out how to calculate the new corporation tax, communicate these changes and then change systems, administration procedures and forms etc.

Full circle - Back to where we were in 1998

The following year in 2006, the outcry caused by this complication caused Labour to reverse IR591 and the nil rate of corporation tax such that the corporation tax for small business was back to where it was in 1998 before Brown first stared tinkering with it. It was a terrible waste of energy and human intellect, introducing confusion and complexity, where exactly the opposite was required to create an environment friendly to small business. Brown’s corporation tax experiment had failed spectacularly only succeeding in encouraging mass incorporations.

The MSC legislation

Realising now that IR35 had failed and disguised employees were still a problem, Labour now introduced the Managed Service Companies (MSC) legislation in 2006. This time though, focus was on the companies providing services to contractors (service providers) and the recruitment agencies that were feeding contractors into their clutches.

In essence the legislation imposed an extra tax on the contractor who was found to be operating a limited company via a service provider that was managing or influencing and controlling the affairs of the contractors’ limited company. If the HMRC failed to recoup tax from the contractor they could transfer the liability to the owners of the service provider and failing that the liability could also be transferred to the recruitment agency if they had conspired to refer the contractor to the service provider. This legislation was very effective in curbing the use of limited companies but placed an added burden on contractors or any company offering personal services. Companies offering personal services now had to try and determine whether or not the accountant they were using was compliant with the MSC legislation or face the liability for an increased tax bill. In reality this was an unrealistic expectation that further complicated the life of genuine contractors and self-employed service companies, increasing their administrative burden and costs and served to discourage genuine business start-ups in this line of business.

Increasing Employers NI

Whilst Labour congratulated themselves for reducing corporation tax for small business, Brown gradually began increasing the rate of employers National Insurance from 10% to 12.8%. Distinguishing National Insurance from tax, Labour claimed not to be increasing taxes.

It provides a good example of a stealth tax, since small businesses now found their staff bills (normally the largest expense in a business) increasing. This could only further discourage business from taking on staff on their payroll and encourage the practice of informal trading by dealing in cash payments for work completed.

Flat Rate VAT

From 2002 Brown introduced the flat rate VAT scheme. This was win/win for all since it reduced the complexity of calculating VAT and increased the profits of many micro-businesses especially PSCs. The HMRC benefited since it reduced the complexity of VAT investigations and administration hence cutting costs. Flat rate VAT was a labour success story, mainly for certain micro-businesses.

The increase of Corporation tax

In 2008, Alistair Darling announced he would decrease corporation tax for large business by 2% whilst small business tax would increase by 2%. Once again small business got the raw deal and bore the brunt of government attempts to increase its tax base.

Companies House efficiencies

In the years labour has been in power, the efficiency of Companies House in administering and enabling the set up of limited companies has markedly improved. HMRC have increasingly enabled tax returns to be submitted online, hence reducing paperwork and administration. Labour are quick to claim credit for this but one cannot help but feel that these efficiencies are largely as a result of the progress of technology, (specifically data base systems on the internet) and were inevitable regardless of the party in power.

The increase in capital gains tax

In 2008, Darling increased the rate of capital gains tax on the disposal of a business by 80%. This was introduced as a means of taxing the private equity fat cats. The reality was it affected small businesses far more than large private equity. It in effect discouraged entrepreneurship and encouraged short-termism. Most punters regarded this as a step backwards.

Maternity and Paternity Pay

The labour government has more than doubled maternity pay since it came to power. The generous leave given to new parents by labour are hailed by most as a success but few realise the practical difficulties this causes small business. Staff of a small business are often stretched to the limit to keep the business ticking over. Having to support an unproductive employee for up to nine months can make or break a small business.

Conclusion

Labour started off well with the reduction of corporation tax and the abolition of advanced corporation tax. However, this progress was later marred by the debacle of Brown’s experimental tinkering with corporation tax, the concurrent increase in employer’s national insurance and the raising of corporation tax in 2007/2008. It is doubtful that labour achieved many of it aims for assisting small business, nor did they address the problems that small business complained about.

The attacks on the contractor sector of small business increased the red tape for small business and created barriers to entry for start-ups of personal service businesses. IR35 was a failure, introducing complexity and had to be further backed up by the MSC legislation which was effective in stemming disguised employees but introduced further complexity and burdens on contractors and personal services businesses.

The introduction of flat rate VAT was a success and together with the example of the abolition of advanced corporation tax provides a good case study of how legislation that reduces red tape for both businesses and HM Revenue and Customs, is the most effective.

There have undoubtedly been increased efficiencies in Companies House and HMRC mainly from investing in IT systems and processes that serve to cut down on paperwork. However, these efficiencies were inevitable given the progress in IT technology since Labour came to power.

The impression that small business is merely a secondary consideration to large business has been reinforced by Labour lowering corporation tax for large business by 2% increasing it by 2% for small business. This impression is reinforced by the increase in capital gains tax, the increase in maternity and paternity benefits which all impact small business much harder than large business.

Labours track record in trying to stem disguised employment illustrates how difficult it is to execute legislation for one sector of business that does not negatively impact other sectors. Perhaps future governance needs to distinguish between the types of businesses and their broad range of requirements before enacting new legislation.

What questions might they ask me?
Existing contractors, people considering contracting for the first time and end-clients might all ask you about a range of subjects relating to :

• Umbrella Company
• Limited Company
• Pros and cons of contracting
• IR35
• MSC legislation
• Offshore structures
• What constitutes a safe and compliant contractor accountant?

Why do I need to know?
Satisfy your candidates and increase your sales efficiencies by assisting contractors with making decisions on operating efficiently and compliantly within UK tax law.

Protect your company and directors against the risk of debt transfer under the new MSC legislation. Reassure your clients that your contractors comply with UK legislation and are not exposing them to any adverse employment tribunals or HMRC investigations.

What is the purpose of this guide?
This guide is intended to raise awareness of issues that have far reaching consequences for agencies, contractors and end clients alike. This information will help protect your agency and clients from risk, whilst assisting your contractors to operate efficiently and within the law.

The aim of this guide:

•  To be informative, without swamping you with detail.
• To offer practical solutions so you can focus on your core business and clients.
• To simplify complicated issues so that the implications are clear and relevant to everyone in your agency.
• To enable you to give constructive and timely advice to your contractors, whilst protecting your agency from risk.
•  To speed up your contract sales process and ensure that contracts run smoothly once the contractor has started.

Free Agency Helpline
If you want more details on related subjects, simply click on a link, or call our FREE Agency Helpline on 020 7471 9330. This is a completely free information service for recruitment agencies and we will be happy to clarify things without any obligation on your part.

IR35 - a summary for agencies
IR35 is a complex and contentious piece of legislation, concerned with showing whether or not a contractor is a “disguised employee” for the purpose of avoiding tax. Here is a simple summary of IR35 and how it relates to your business.

What is IR35?

• IR35 explained
• Employment rights for contractors inside IR35

IR35 – Achieving win/win for your company, contractors and clients.
To make sure a contractor is outside IR35, the hypothetical relationship of the contractor to the client must be that of self-employment. By ensuring contractors are outside IR35 you achieve the following:

• Contractors earn more money through a limited company and are happy.
• Reassure clients that employee benefit claims are highly unlikely since contractors outside IR35 do not have an employment relationship with them.
• You benefit from happy candidates and clients.
  Get it wrong and all parties could lose with contractors potentially claiming employee benefits.

MSC legislation – what should agencies do?
If you refer a contractor to a provider that is not compliant with the Managed Service Company (MSC) legislation, and the contractor subsequently does not pay the tax that is properly due, HMRC may ask your company to pay the bill.

Want to know all the details?

• MSC legislation in detail
• MSC legislation in summary
• How do you tell if a service provider is MSC compliant?
• Disguised Umbrella companies and agency exposure

Is referring to Umbrella Companies safe?
Many recruitment agencies have reacted to the MSC legislation by only referring contractors to umbrella company providers. However, some of them may be unsafe. For example, some Umbrella companies can disguise offshore structures or elaborate self-employment structures, which expose agencies to increased (not less) risk of debt transfer.

Can you rely on questionnaires to unknown service providers?
This may absolve your company of liability but it is only as reliable as the person filling them in. They obviously have a vested interest in telling you what you want to hear. Only through an independent audit of the processes of the service provider can you really be sure a provider is credible.

Solving the MSC headache
All Accountancy Service Providers CLAIM to be compliant with UK laws. Few can actually PROVE it. Now there is a way you can tell if they are compliant and it costs you nothing.

Guaranteed compliance
There is an audit standard where service providers that offer both umbrella and limited company solutions to contractors can be independently assessed for compliance with the MSC legislation. The audit standard developed by Professional Passport in conjunction with HMRC cuts through the clutter and provides an independent and reliable method for recruitment agencies to gauge the compliance of a service provider with the MSC legislation.

Advantages to the agencies are:

• It costs you nothing.
• PSL can be decided with confidence
• Cuts the time and expenditure spent on due diligence
• Reduces the risk of Debt transfer

Create win/win with preferred suppliers
Professional Passport’s audit certificate is only issued to providers that employ best practice. If you only have compliant providers that operate to high standards on your PSL, then you will be guaranteed to gain significant competitive advantage.

Advantages for everyone
Ensure your PSL confers the following advantages:

• Contractors use the correct tax structure for their unique circumstances and are not exposed to risk
• Clients reduce their risk of employee benefit claims from contractor’s whose IR35 situation has been professionally assessed

How you can tell if a service provider is doing their job:
1. How do they assess the best structure (Ltd or Umbrella) for the contractor? Consideration should be taken of the unique circumstances of the contractor in this decision as shown in this important guidance.
2. How do they advise contractors on IR35?

Some service providers offer free contract reviews that do not professionally assess a contractor’s real exposure to IR35. Service providers should provide knowledgeable advice on IR35 but ensure that a contractor’s IR35 situation is independently assessed by employment law experts. Read more about why this is important and on a recent survey on this matter.

If you would like to know more about anything in this guide, please call us on 020 7471 9330 or email davekerr@london-1st.co.uk Alternatively visit our agency information centre at www.london-1st.co.uk

There is a strong argument that it is in the accountant’s interest to find a contractor outside IR35, so that they can earn accounting fees from providing their services. HMRC have recognised this in the MSC legislation, where they have made it explicit that any service provider giving insurance against IR35 is likely to fall foul of the MSC legislation.

This conflict of interest was clearly illustrated to me recently when a new contractor telephoned to enquire about our services. In the end the contractor decided to use another accountant because their fees included regular contract reviews as part of their service. When we questioned the extent of the review that was promised, it became evident that they were merely checking the contract was “IR35 friendly” and there was no attempt to review the working practices - a crucial factor when establishing IR35 status. We pointed out the importance of reviewing the work practice and explained that we would ensure that he would receive an independent review by legal experts who specialise in IR35. However, he was not swayed.

There are several issues here. Firstly, the MSC legislation does not yet appear to have been widely or publicly enforced. Consequently, some service providers continue to give advice that may appear attractive to contractors in the short-term, but in reality exposes contractors to the risk of heavy penalties from HMRC.

Secondly, accountants offering contractors a review of their IR35 status are in danger of exposing their clients to the MSC legislation, since it is in their interest to “influence or control” a contractor’s decision on their IR35 status.

Thirdly, what qualifications do accountants have to assess the working practices of contractors, agencies and their end clients, which are essential when reviewing the status of IR35 contracts? This function should undoubtedly be performed by legal specialists who only have the interests of the contractor in mind. It cannot properly be 

performed by accountants who have a vested commercial interest in the contractor’s IR35 status.

Dave Stewart is Director of London 1st Accounting Services. For more information contact 020 7471 9330 or visit www.london-1st.co.uk.

It has always been important to us to give the correct advice, tailored to our clients’ specific circumstances and to facilitate their due diligence obligations. We have always preferred to consult with our clients in person, as this is usually the most effective way to communicate the complexities, benefits and responsibilities of contracting through a limited company.

The development of our online consultation means that we can now bring this personal touch to all our prospective contractors, regardless of their geographic location.

You can now log in to your own personalised tax consultation website, (www.taxprojector.co.uk) at the same time as one of our expert consultants. You can benefit from the same advice that they would give you if you were sitting alongside them, looking at the screen together in our office.

In a typical consultation you will be guided through a series of key decisions that need to be taken in the following areas:

1. Is a Limited Company the Correct Structure? – Analysis of your unique situation and comparison of different contractor structures.
2. IR35 - Review your understanding of IR35, view our recommendation and plan for IR35 contingency, if you are uncertain.
3. Do you require a contractor accountancy solution? - Our flexible range of services allows you to choose the level of support you require.
4. VAT review - Review and recommend the VAT scheme that is best for your specific situation.
5. Salary Review - Review the salary you are paying and its impact on your income.
6. Dividend Policy Review - Review what dividends you pay yourself and its affect on the tax you pay.
7. Tax Planning and Company Investments - Should you be investing surplus income into such things as a personal pension and are you structuring your affairs for tax efficiency?
You are able to see the impact that each decision has on the financial benefits you can expect and compare this with other structures.

After completing the consultation you are provided with a report on the following:
• Summary of advice and the decisions made on tax structure choice and set up of a limited company.
• Financial reports including your projected earnings, comparing different tax structures.
• Information and advice that assists you with each decision..
This report helps to show that you have taken reasonable care in establishing your IR35 status and would be very useful, should you ever have to demonstrate this to HMRC.

You can see the contractor calculator at www.taxprojector.co.uk or call us for more information at 020 7471 9330.

With a plethora of different services out there it is difficult for contractors to make a decision on a compliant and quality services provider. We unravel the complications and give you the low down of what is good, what is bad and what to look out for.

Managed Service Company (MSC) Legislation

This legislation was introduced in April 2007 and essentially revolves around how an accountancy services provider delivers services to contractors. If they deliver a service that is deemed by the HMRC to influence or control the actions of the contractor, the provider is deemed to be caught by the MSC legislation. All contractors using the services of a caught provider will be liable to pay PAYE and NIC on income received in their company. For more information about the MSC legislation click here.

Your first task will be to determine if the accountant falls within this legislation and obviously every accountant is likely to assure you that they are compliant. So how can you do your due diligence on this? Fortunately, there is an independent audit standard that has been developed by Professional Passport to determine the MSC status of contractor service providers. This relieves contractors of the burden of determining the MSC status of an accountant and provides peace of mind that the provider does not fall into this legislation. Service Providers that have passed this audit are also more likely to deliver superior services than competitors.

Clues From Your First Consultation

Usually an accountant will offer your first consultation free of charge. This will provide the first clue of how good they are. Advice given should be thorough and consider your personal circumstances. Beware of tax avoidance schemes such as offshore, self-employed and employee benefit trust schemes. The table below lists the elements of a good and a bad consultation. Accountants that provide quality, honest advice in your first consultation are also likely to provide good advice on other matters in the future.

Elements of advice to Contractors seeking to contract through a Limited Company that indicate a good or a bad consultation. 

Essential Service Elements

The common service elements that an accountant should provide a contractor are listed below.

1. Bookkeeping Facility.

Why do you need this? This is a basic tool that is vital for basic record keeping. You need to invoice your client/agency and be able to monitor what has and has not been paid. This should at least include an invoicing facility and an expense recording facility.

What can I expect? Invoicing facilities should allow you to easily record your activity and hours and enable you to print or email the invoice to your customer/agency. An expense recording facility should enable you to categorise your expenses and record whether you have paid for it personally or from the business account. Such facilities can range from basic spreadsheets that you email to your accountant, to more advanced online systems that provide the traditional features of most accountancy software such as profit and loss reporting, drill downs, reconciliations and invoice age analysis. Some accountants will use sophisticated web-based software which is the best way to communicate to and fro between accountant and client and can make a large difference to the service levels that you experience. The sophistication of the bookkeeping facility that your accountant provides for you can indicate how far evolved they are in providing a quality, well-considered service.

2. Regular Bank Reconciliations.

Why do you need this? This service element is rarely highlighted by accountants, yet it is the most important ongoing activity that checks the integrity of your accounts and keeps you in touch with your real company position. The reconciliation checks that the cash at bank reflects what is recorded in your accounts, such as what is available for dividends or what is set aside for future liabilities such as VAT or corporation tax. Regular reconciliations are important for analysing cash flow and monitoring that invoice payments and expense payments such as VAT are timed such that you do not run out of cash. Regular reconciliation also ensures that mistakes have not occurred. For example, duplication of invoices or expenses can give completely incorrect information about your profitability and lead to incorrect, dividends, incorrect VAT returns and corporation tax calculations. Without regular reconciliation's your accounts could be inaccurate making strategic decisions difficult and could lead to cash flow problems, e.g. not leaving enough money in your account to pay VAT.

What can I expect? Many accountants will offer quarterly reconciliation's or even annual reconciliation's. If you are pushing your cash flow to the limit, make sure your accountant reconciles your bank account monthly, weekly or even daily. Alternatively make sure they provide you with a facility to do the reconciliation yourself. Failure to reconcile regularly could mean that you get a shock when you find you do not have enough cash in your account to pay liabilities and need to pay money back to your company.

3. VAT Returns

Why do you need this? Depending on your circumstances it can benefit the company financially to be VAT registered. If you are VAT registered you will have to do a VAT return to HMRC once every 3 months. Failure to do so can result in penalties and interest, which includes late returns.

What can I expect? Most accountants will offer VAT returns, but make sure that they are reconciling your bank account before they do a return and that they offer a “cash VAT” return (VAT return based on invoices and expense that have been paid). VAT returns that are non cash could cause cash flow problems if your client/agency is late in payment. Your accountant should complete the VAT return for you well before deadline for your perusal and advise on whether you have enough funds to pay for the return. Due to MSC legislation it is not advisable to expect your accountant to make payment.

4. PAYE Returns

Why do you need this? Most directors will pay themselves a salary from their company whereby Tax and NI is owed to the HMRC either monthly or quarterly. 

What can I expect? Your accountant should calculate this for you and help to fill in the return before the deadline. Once again make sure a reconciliation has been done to verify the return is correct. Due to MSC legislation it is not advisable to expect your accountant to make payment.

5. Annual Returns

Why do you need this? Once a year your company must make a return to Companies House on specific company information before a certain deadline. Failure to meet the deadline can result in financial penalties.

What can I expect? Most accountants will do this for you as part of their service. Companies House charge £15 fee for the return and it can be done online to save the hassle of dealing with paper.

6. Annual Statutory Accounts and CT61 Return

Why do you need this? It is a statutory requirement to provide company annual financial statements in a certain format to HMRC and Companies House. HMRC accounts must also be accompanied with a corporation tax return (CT61) which is an assessment of the corporation tax payable. Late returns and payment can result in penalties and interest.

What can I expect? Most accountants bundle this as part of their service but be vigilant for accountants that charge you annual service fees that do not include annual accounts and they then charge you a lump sum before preparing accounts at year end. Accounts should be prepared and presented to you for signing well before the deadline. Corporation tax must also be calculated for you to make payment before the deadline. Due to MSC legislation it is not advisable to expect your accountant to make payment.

7. Calculation of Liabilities and Regular Reporting

Why do you need this? One of the most important service elements is how your accountant updates your accounts, calculating the company liabilities outlined above and providing you with a report on the company position so that you can analyse your company position, make decisions and determine dividends.

What can I expect? A typical service will rely on the information you provide and then make calculations and then provide you with company reports. Make sure the information you receive is verified by company bank reconciliation as outlined above. Quality reporting will inform you of your company bank balance, what funds should be set aside for liabilities (tax) and what profits are available for dividend declarations. A good accountant will discuss a sound dividend or remuneration strategy with you and help you plan and monitor a personal tax strategy. The least you can ask for is an up to date Profit and loss and balance sheet that reflects your latest bank account balance.

8. Personal Tax Return Preparation

Why do you need this? As a director of a limited company you are obliged by law to submit a personal tax return for each financial year. This is not part of your company tax but constitutes tax on the income that you receive personally.

What can I expect? This service can be offered as part of your company services packages or may be charged for separately. Make sure you ask your accountant at the beginning about this. Make sure you scrutinise your personal tax return carefully that your accountant has included all your personal income correctly or you could be liable for a false return.

9. Advice Customer Service

Why do you need this? It is obvious that you will often need to talk to your accountant or seek advice on many aspects of running your business.

What can I expect? Some accountants will limit advice you can ask each month on a time basis whilst others will provide unlimited support and advice with a personal adviser who is available at any time and who is normally familiar with your company circumstances. The latter is obviously more desirable.

10. Scope and Flexibility of Services

Individuals may require different levels of support depending on personal circumstances and preferences. Some contractors want to focus only on their core business in generating invoiced income and have neither the time nor inclination to get involved in accounting or company compliance. Contractors may also evolve in their service and support needs from the time they first start contracting to becoming seasoned contractors. A good accountant should evolve with the life cycle of a contractor business and provide services that are flexible enough to mould to the contractors needs. Hence, contractors that require less support should be able to tailor the services they require to their needs so that they are able to ask for the support they require and reduce their reliance and the price of their accountant.

Many Antipodeans in the UK are professionals who contract through recruitment agencies and have a reputation for hard work and professionalism which makes them highly sought after – especially for filling gaps where shortages are prevalent, such as in engineering and surveying. The backpackers are still here but many are professionals who travel between contracts.

The result is that several companies have been established in the UK to cater for the needs of these Antipodean professionals, including umbrella and limited company service providers. Unfortunately, the old gung-ho back packer mentality is still reflected in the offerings of some of these providers. Many of them continue to tout offshore and tax mitigation structures whose legality is highly questionable. Such companies seem to rely on a vague understanding of the non-domicile status of Antipodeans, combined with a notion that they can simply flee back to their own country when it looks like they are heading for trouble.

Such companies offer incredible, returns such as “82% of your gross income” which attracts cash-hungry contractors to fund their next adventure. Many of these companies advertise in magazines and newspapers that focus on local social venues and news from home for Antipodeans, but base themselves offshore. Even onshore companies will stretch the law to the maximum. You would be hard pressed to find an Antipodean contractor who understands the MSC legislation and the very real threat that it poses to them. Many gravitate towards companies where they hear a familiar accent and word of mouth is a key factor in how they select their provider. Combine this with a naivety and devil-may-care philosophy of people fresh off the boat and you have a market which cowboy service providers can feed off.

Most Antipodean professionals contractors are sensible and responsible citizens, seeking to establish themselves in unfamiliar surroundings. They would not knowingly break the laws of their host nation but their general lack of

awareness makes them easy prey for cowboy service providers. HMRC has this sector firmly in their sites and ignorance of the law is not an excuse they accept. The cowboy providers may be able to get away with it but some Antipodean contractors could end up paying a very high price.

For an objective, compliant and tax efficient solution simply input a few details into this FREE online tax consultation.

David Stewart is from Zimbabwe and is a director of London 1st Accounting Services Ltd, established in the UK in 1998. London 1st has been independently audited by Professional Passport as a compliant service provider.

Contractors on this service can now make certain that their limited company accounts reflect exactly what is in the bank account, avoiding costly mistakes on VAT returns and overpayment of dividends and salary without having to enlist their accountant. It is simple to track what invoices have been paid, which is heaven-sent for monitoring payments from recruitment agencies.

Sri Hall of Cheeta Ltd and an IT application planner was one of the first to use the software and remarked,

 “I have been trialling your new online bank reconciliation system and have found it to be an extremely useful tool and user friendly.  I can now be sure that all director and company paid expenses are accounted for on a daily basis.  I no longer have to keep a separate spreadsheet and have the confidence that my remittance advice's are based on up to date information.”

The new addition to London 1^st software enables contractors to be less reliant on an accountant for reconciliations and hence the cost is very competitive. Director of London 1^st business development, Tracy Purdon, says that,

 “Requests from contractors showed that they wanted increased ability to take on more accounting work themselves but were unsure how to go about it without errors creeping in. We devised this system so that contractors have a simple method of updating their own accounts, but with maximum integrity such that we as their accountant can monitor what they are doing via the software at a reasonable price. The software does the work for us.”

Dave Stewart, Managing Director of London 1^st sums it up.

“Contractors can now choose what level of support they require from their accountant with the software forming the tool for delivering and receiving the service. All contractors need to decide is what they want to outsource to us. Hence, inexperienced contractors can take on our business support services for maximum support whilst our accounting support services will suit experienced contractors that require differing levels of accounting support. London 1st will thus move with the lifecycle of the business at the pace of the contractor, with the contractor deciding on level of support and price of service.”

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Although many of these schemes have produced barrister’s opinions which state that they are not subject to the MSC legislation, HMRC have made it clear that they disagree with such opinions and in fact they are more likely to trigger an investigation rather than deter one. Contractors using such structures are therefore more at risk and should be aware of the grave financial penalties of the MSC legislation being applied to them.

HMRC have also made it clear that any income generated in the UK will be subject to UK tax law and as such will also seek to apply the MSC legislation to offshore structures. There is anti-avoidance legislation that requires any onshore promoter of the avoidance scheme, or any individual using the scheme, to register the structure with HMRC.

Since most of these structures are promoted from offshore, it is unlikely that the promoter will register them and therefore the responsibility (and resultant penalties) falls on the contractor.

Failing to register a scheme within the 5 day requirement incurs an initial penalty of £5000 and £600 per day thereafter. Most contractors are unaware of this requirement and the potential liability that could be amassing. Use extreme caution when being tempted by large returns from offshore structures, self-employed structures and partnership structures. Limited Companies are still the most tax efficient option that can be legally operated if you do your due diligence.

We would urge you to seek professional advice from a reputable contractor accountant.  If you have any questions or queries contact info@london-1st.co.uk , or call us on 0207 471 9330.

Contractors were encouraged to use umbrella companies until the government started threatening Umbrella companies that were abusing expenses. The fact is, that although the environment is much more complicated, limited companies are still the most tax efficient structure that contractors can utilise.

Provided you ensure that you are outside the IR35 legislation and using a service provider that is compliant with the MSC legislation, you can run your company in the most tax efficient manner. Reputable accountants (see on how to distinguish between a reputable accountant) that specialise in services for contractors, are best qualified to advise you about a suitable structure for contracting and will normally recommend, either a limited company or an umbrella company structure, depending on your personal circumstances. 

However, there are a lot of providers advertising structures that promise to bypass all limited company legislation. They appear to offer returns that seem too good to be true – and they almost certainly are. Many of these structures, such as offshore schemes with employee benefit trusts and companies that will invoice on your behalf and pay you as a self-employed worker, expose contractors to substantial financial risk.

Umbrella companies avoid the exposure to IR35 and the MSC legislation but are not very tax efficient. Many high profile umbrella providers have punted using expenses to boost contractor returns but these are now under close scrutiny and, if HMRC pursue this line of enquiry, will leave contractors with very little savings over PAYE.

The best route for contractors is to enlist the help of an accountant to assist your due diligence, so that you can operate safely and tax efficiently, whilst concentrating your efforts on delivering a professional service to your clients. Many service providers will give good advice on how to do this free of charge.

If you have any questions or queries contact info@london-1st.co.uk , or call us on 0207 471 9330. 

For more information on Umbrella companies vs. Limited companies visit First Time Contractors.

If you are contracting and using a service provider to assist you with any aspect of processing your pay, or helping you with your accounts, it is imperative that you check your provider does not fall within the MSC legislation. Contractors using onshore umbrella company services, that pay all wages via PAYE, are not at risk from MSC legislation. Contractors with their own limited companies, that usually only employ an accountant to prepare annual accounts, are probably not at risk. Those at high risk are the contractors who employ elaborate offshore schemes, or structures where they are remunerated as self-employed.

Contractors who are employing a service provider or accountant to help with their company accounts on an ongoing basis must ensure that their service providers are not influencing or controlling how the company is run. The following are indicators that a provider’s service is influencing and controlling your company affairs, and could therefore put your company at risk of being caught by MSC legislation.

• Providing a standardised corporate solution package other than one where all the income of the worker has PAYE and NIC applied to it.
• Being a director of client companies.
• Being a company secretary of client companies.
• Managing the company bank account or the client companies’ finances through a separate account.
• Charging fees based on the number of invoices raised or the revenue generated by a limited company

Expecting contractors to interpret what constitutes influence and control, as defined in the MSC legislation, is an unrealistic burden to bear. A limited company is still the safest and most tax efficient structure for self-employed contractors and there are limited company service providers that provide responsible, professional services that protect the contractor.

Fortunately, there is an organisation called Professional Passport that independently audits service providers to verify compliance with MSC legislation. Thus, contractors can relieve themselves of the burden of due diligence by verifying that their provider has been independently audited. Otherwise they could face the possibility of paying PAYE and NI on all their earnings.

Dave Stewart is managing director of London 1^st Accounting Services. If you have any questions or queries please contact us or call us on 0207 471 9330. 

For more information download our guide on how to tell who the best contractor accountant is for you.

HM Revenue and Customs are actively enforcing the MSC legislation, with investigations imminent if not already in progress. Press releases on the HMRC website indicate that schemes offering offshore and self-employed solutions are particularly at risk, even though many of them offer barrister’s opinions on the integrity of their schemes. Contractors need to act immediately if they do not want to be caught up in the HMRC investigations.

Limited companies are still the safest and most tax efficient structures through which to contract, provided that you do your due diligence.  If you enlist the help of an accountant or limited company service provider, it is imperative that you determine whether or not they are potentially caught by the MSC legislation. If HMRC rules that a service provider is caught under the MSC legislation, all contractors on the database of the provider will be liable for PAYE and NI on their total earnings, i.e. an extra tax bill of up to 50%.

In short, if you have chosen the wrong service provider to assist you with administering your limited company accounts, you could be facing an expensive financial penalty. The way in which you can distinguish an unsafe provider from a safe one, will be dealt with in the next issue.  However, you should ask your service provider if they have had an independent audit that demonstrates that their services do not fall within the MSC legislation.

An organisation called Professional Passport has, in conjunction with HMRC, developed the most thorough and professional audit of service providers to date. If your service provider has not been audited, make certain you determine that the services being offered will not amount to “influence and control” of your company affairs.

For more information on the MSC legislation visit our guide that advisors contractors on What to look for in an accountancy service provider.

Dave Stewart is Managing Director of London 1^st Accounting Services. If you have any questions or queries contact info@london-1st.co.uk,

Call us on 0207 471 9330 

The audit was performed by Professional Passport, an independent business that has pioneered an audit standard for assessing whether contractor accounting service providers are compliant and fall outside of the MSC legislation. The audit process which Professional Passport has developed in close consultation with HMRC, involved a thorough and exhaustive analysis of all areas of London 1st business.

Professional Passport concluded that London 1st is safe and compliant with the Government’s managed service company (MSC) legislation.

London 1st commissioned the audit to ensure that we have taken every step to ensure that our current and future clients are safe from the MSC legislation, brought out by the HMRC in April 2007.

The audit should ease the minds of recruitment agencies worried about the dangers of debt transfer if they recommend our accounting services or add us to their preferred supplier list.

Accountancy Service Providers that are caught by the MSC legislation could cost contractors thousands of pounds and therefore it is not surprising that most companies claim to be MSC compliant. However, these claims are not independently verified and often demonstrate a lack of understanding of the legislation. If a company claims to be outside of the MSC legislation, be sure to ask them if this has been independently verified.

To read a little more about the MSC legislation click here.