Treasury could lighten up on managed service companies
The Treasury's plans to crack down on managed service and composite companies could change, as
difficulties in enforcement have already become apparent in the consultation stage.
Treasury could lighten up on managed service companies, but composites are set to disappear
The attack planned by HM Treasury on managed service companies will not be quite as fierce as planned, industry sources say. But
composite companies will take the full heat, and probably disappear.
"A crackdown is clearly underway," says a source at a major UK consulting firm, "but it won't be exactly like the crackdown that was
The plans, announced in the Chancellor's Pre-budget speech, and detailed in a document released by the Treasury last December,
would oblige the owner of a managed service company be treated like a salaried employee. But in the course of the consultation
currently underway, the Treasury is reportedly reconsidering how managed service companies will be defined, and in how those
companies will be singled out for treatment. A managed service company does not differ in many respects from any small limited
company. The issue is: how does the Treasury plan to draw the line?
"Drawing the line is indeed the question, because wherever the line is drawn, the operators of managed services companies will be
careful to get on the right side of it," says David Colom, principal at. "If you have a legitimate
contractor, one who is outside of IR35, and one who has his own company, he will simply change his working arrangements so that he
can continue to enjoy the best tax treatment. All that the government will succeed in doing under its current plans is to create a lot of
paperwork as contractors organise themselves into proper limited companies. We're expecting the demand, and we're already creating
new companies to be ready for the avalanche of requests," Colom adds.
All of which means that the chances for the Treasury to enjoy its projected increased tax receipts of $1 billion are very small.
Considerations of this kind on the part of Treasury officials are reportedly behind the prospective changes to the budget.
Operators of umbrella and composite companies are obviously in uproar over the move. They point to the amount of paperwork that the
move will generate. Then they wonder how the Treasury intends to police the 240,000 contractors who currently work under schemes
Experts agree, however, that the Treasury is correct in targeting those companies that take unfair advantage of managed service- and
Says Mark Morris, sales director at., a company providing umbrella services to contractors: "The companies that should be
targeted by this legislation are those that take unfair advantages. We don't offer anything the law doesn't allow."
Morris points out that some companies which sell services of the umbrella or composite type market themselves with supposed tax
advantages. They tell their clients that they can take all sorts of deductions that are simply not licit. Or they tell them they are
"And they get away with it because, at the end of the day, the contractor is the one liable for taxes, not the composite company
That will change, of course, if the current legislation is adopted as planned. Under the Treasury's current proposals, umbrella companies
that provide abusive tax status for contractors will be held liable for back payment of income tax and national insurance.
As Morris explains, the catalyst for change under the new legislation will be the recruitment
agencies. "These are already sparking a marked movement away from composites. It's likely the
composite will die a slow death-contractors are a bit slow-moving in general-by the end of next
David Colom qualified as a Chartered Accountant in the City of London in
The Treasury's plans for managed service and composite companies may be found
1981 and is the founder and principal of D J Colom & Co Chartered Accountants established in 1989.
Published: Thursday, January 18, 2007 
Treasury could lighten up on managed service companies
The Treasury's plans to crack down on managed service and composite companies could change, as
difficulties in enforcement have already become apparent in the consultation stage.
Treasury could lighten up on managed service companies, but composites are set to disappear
The attack planned by HM Treasury on managed service companies will not be quite as fierce as planned, industry sources say. But
composite companies will take the full heat, and probably disappear.
"A crackdown is clearly underway," says a source at a major UK consulting firm, "but it won't be exactly like the crackdown that was
The plans, announced in the Chancellor's Pre-budget speech, and detailed in a document released by the Treasury last December,
would oblige the owner of a managed service company be treated like a salaried employee. But in the course of the consultation
currently underway, the Treasury is reportedly reconsidering how managed service companies will be defined, and in how those
companies will be singled out for treatment. A managed service company does not differ in many respects from any small limited
company. The issue is: how does the Treasury plan to draw the line?
"Drawing the line is indeed the question, because wherever the line is drawn, the operators of managed services companies will be
careful to get on the right side of it," says David Colom, principal at DJ Colom & Co. Chartered Accountants. "If you have a legitimate
contractor, one who is outside of IR35, and one who has his own company, he will simply change his working arrangements so that he
can continue to enjoy the best tax treatment. All that the government will succeed in doing under its current plans is to create a lot of
paperwork as contractors organise themselves into proper limited companies. We're expecting the demand, and we're already creating
new companies to be ready for the avalanche of requests," Colom adds.
All of which means that the chances for the Treasury to enjoy its projected increased tax receipts of $1 billion are very small.
Considerations of this kind on the part of Treasury officials are reportedly behind the prospective changes to the budget.
Operators of umbrella and composite companies are obviously in uproar over the move. They point to the amount of paperwork that the
move will generate. Then they wonder how the Treasury intends to police the 240,000 contractors who currently work under schemes
Experts agree, however, that the Treasury is correct in targeting those companies that take unfair advantage of managed service- and
Says Mark Morris, sales director at Parasol Ltd., a company providing umbrella services to contractors: "The companies that should be
targeted by this legislation are those that take unfair advantages. We don't offer anything the law doesn't allow."
Morris points out that some companies which sell services of the umbrella or composite type market themselves with supposed tax
advantages. They tell their clients that they can take all sorts of deductions that are simply not licit. Or they tell them they are
"And they get away with it because, at the end of the day, the contractor is the one liable for taxes, not the composite company
That will change, of course, if the current legislation is adopted as planned. Under the Treasury's current proposals, umbrella companies
that provide abusive tax status for contractors will be held liable for back payment of income tax and national insurance.
As Morris explains, the catalyst for change under the new legislation will be the recruitment
agencies. "These are already sparking a marked movement away from composites. It's likely the
David Colom Source: http://www.contractorcalculator.co.uk/pdf/treasury_managed_service_companies.pdf
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