HMRC & compliance

Managed Service Companies

In April 2007 new legislation was introduced by HMRC regarding managed service companies (MSC's). The position can be clarified as follows:

If you are deemed to be a MSC you will be taxed as if an employee of the end user, that is subject to full PAYE and National InsuranceI. There will be no facility to draw dividends and no deduction for travel and associated expenses.

What is an MSC?

An MSC is defined as a company that does all of the following:

Wholly or mainly provides the services of individuals
Pays out most of the company's income to those individuals
Makes payments to the individuals exceeding employment income, and
A person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals (an MSC provider) is involved with the company.

All other contractors operating through any other type of Limited company are potentially caught, dependent on the characteristics of the "provider" rather than the characteristics of their specific company.

What is involvement?

Involvement entails the provider doing one of the following:

Benefiting financially on an ongoing basis from the provision of the services of the individual.
Influencing or controlling the provision of the services.
Influencing or controlling the way in which the payments to the individual are made.
Influencing or controlling the company's finances or its activities.
Giving or promoting an undertaking to make good any tax losses.

Are there exemptions?

Professional accountants (and lawyers) are exempted from being defined as an MSC provider as long as they only provide the "usual" services of an Accountant.

So what are the options going forward?

For any contractor choosing to operate through any form of Limited company, the options are either a quality Umbrella Scheme or a Limited Company where there is no involvement of a MSC provider.

What is FLB's position?

FLB has always been, and remains, a firm of professional accountants (regulated by the Association of Chartered Certified Accountants). The firm has a wide range and volume of clients outside of contractors working through their own Limited Companies.

It has been concluded by Tax Council that a firm such as FLB is not "involved" with the client companies because:

Whilst they do benefit financially on an ongoing basis, by virtue of receiving fees, this is not directly based on the provision of services of the individual. I.e. where an individual does not work for a month a monthly fee is still charged.
The firm cannot influence or control the provision of the actual services.
The firm does give advice on the most tax efficient way in which the individual should pay themselves but since the choice of action finally rests with the client it is not controlling or influencing the way in which payments to the individual are made.
Since the firm is not a director, does not control the bank account and does not advise on activities the firm is not controlling the company's finances or its activities. As a consequence we are happy to continue to offer limited company services to contractors.