Updated July 2009
We have listed below three areas of business tax which continue to interest H M Revenue & Customs. Please note that the comments below are based on comments made by HMRC and are not presently the subject of legislation.
Managed Service Companies (MSC) legislation
If a company is an MSC, IR35 is suspended: instead, workers within MSCs are deemed to be within PAYE and NICs for all of their receipts, including dividends. In addition, the current reliefs for travel expenses are limited, so that any travel to and from the client are normally not deductible for tax purposes.
The rules that apply to MSCs are particularly harsh from a tax perspective. However HMRC still believe that further legislation may be necessary to stop certain avoidance activities.
Arctic Systems – income shifting
You may remember the Arctic Systems case concerned with the husband and wife team of Mr and Mrs Jones who formed a limited company each owning one share. Mr Jones provided computer services to external end-users and his wife supplied accounting and secretarial services, which took her 4-5 hours a week. In most years they were both paid a small salary and the remainder of the profit was distributed equally to the two of them by way of dividend, which reflected their equal shareholdings in the company. HMRC took issue with this asserting that the dividends should be split in accordance with the underlying contribution by each party to the business. HMRC lost the case and have no current plans to introduce legislation in this area – they are however keeping the matter under review!
Subcontractor status in the construction industry
The following comment was published recently by HMRC:
‘The Government is concerned about false self-employment within the construction industry. This can result in an unfair commercial advantage and possible exploitation of vulnerable workers. The Government will continue to work with the construction industry and others to find a way to address this problem, taking account of challenges facing the industry and its need for a flexible labour supply.’