The risk vs reward is something that every business has to think about, and risk is often the more usual approach. Every freelancer or contractor knows that risks are a necessary part of running their business and may have to be taken often. Of course you can always decrease the chances you have to take by implementing some other methods (like proper cash management procedures and focusing on business development), but the risk is willing to be taken to grant beneficial tax options. There has got to be a way to hold onto the profit you make from owning your own business, but with no risk, right? Well you wouldn’t be the first to ask that question and chase down the result.
Back in 1999, IR35 was introduced to the world and Managed Service Companies turned into the new trend or fad. It was a an idea that seemed simple enough to work, while minimizing most of the risk usually involved with business initiatives.
To explain it easily, Managed Service Companies (or MSC from here on) gathered different contractors into bands and then offered them pieces of the company in shares. Instead of being paid simply by salary, they received a decreased wage but instead received a number of dividends. There accounts and credit situations were handled by the organizer of said company and contractors rarely had to do any manual input of their own.
With this new scheme available, contractors flocked to MSC in droves, allowing them to minimally approach tax issues and yet retain compliance with regulations and financial laws. Accountants were not necessarily needed to conduct these procedures either, as the providers were basically accountant businesses in their own right. After paying an easy, monthly membership fee, these contractors would have the above services provided, but at times have even been known to cover certain costs due to mistakes in filing or administrational errors.
Well as you might expect, the HMRC didn’t like this; not, one, bit. After only seven years of being in operation, MSC took a hit due to new finance and taxation laws implemented by the HMRC. Every employee involved in MSC were taxed just like vanilla employees.
The HRMC has strictly stated that Managed Service Companies retain the following features:
- The operation is presented to the contractor as a ‘paid-for’ business.
- Contractors then choose how they will carry out their service.
- The operation takes part in the remuneration process for contractors.
- The operation, not the contractor, takes care of their accounts and administration.
- They ensure that any tax losses will be covered, should they ever occur.
Due to these new rules being implemented back in 2007, any contractor that is caught red handed using MSC, then HMRC can stick their grubby little fingers into your tax and remove some of your hard earned cash, just like a PAYE taxation process.
Your Accountant- When They Are More Than Just That
The trendy or fad driven MSC of the early 2000s have all but vanished since their initial inception. However, that isn’t to say that certain MSC regulations are implemented in the area regarding contractor accountants.
Basically, to avoid any potential threats or risks from the HMRC, you should just stay away from any one size fits all business models, where they offer a multitude of accounting and administration processes. Even if the said company doesn’t appear to be bending or actually breaking any MSC rules or regulations, if HMRC doesn’t believe that the business is on the up and up, you could be in big trouble.
Those who have been in the IR35 and MSC position before will always tell you to be careful of any business or providers that are offering you the chance to bring home a certain amount, or offer to take care of all your administration and accounting tasks. In legislation terms, being in control of a person’s financial invoices means that they have control over your company’s financial decisions and accounts. This is a major warning sign to HMRC and will no doubted cause you some problems down the line.
As the old adage goes, “Nothing worth having comes easy,” and it’s the same when contractors have to put the time into their business and services. There is never an all-in-one answer to reduce risk and raise reward, but that’s all part of the fun running a business, right?