Managed Service Companies

Composites Out, MSC rules in !
The Managed Service Company (MSC) rules came into force on 6 April 2007. The main aim of the legislation was to stop individuals gaining the tax benefits of working through a composite company or single person company scheme.

What makes a company a MSC?
The legislation loosely translated means a company could be a Managed Service Company (MSC) if the person working for the company provides their own services, receives most of the money they generate and they pay less tax than an employee would (i.e. through dividends). The first requirements to be a MSC are typically satisfied by most limited companies.

However there can only be a MSC where there is also a MSC provider, one cannot exist without the other. After the above conditions are satisfied it is important to establish whether there is a ‘provider.’ A company will be deemed a MSC provider where:

“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”.

That company promoting or facilitating the use of the company will be classed as a MSC Provider and the company it is promoting or facilitating will then be a MSC.

If the company (the MSC provider):

a) Benefits financially on an ongoing basis
b) Influences or controls the provision of those services
c) Influences or controls the way in which  payments are made to the individual
d) Influences or controls the company finances or any of its activities, or
e) Gives or promotes an undertaking to make good any tax loss

They will be deemed to be “involved with the company” and as such will be classed as a “provider” making the service company a MSC.  It must be noted that the legislation only requires one of these provisions to be met.

Accountancy / Agency Exemptions
There is a common misconception that accountants and agencies are automatically exempt from the MSC Rules. This is not strictly true are you cannot escape the MSC rules merely by saying you act as an accountancy practice.

If accountants merely provide their services in a professional capacity and agencies merely place individuals with others that wish to obtain their services it is unlikely that they will be caught by the MSC rules. If they go beyond this level of service however they could find themselves acting as a MSC Provider.

Consequences of the MSC Rules
Composite companies and single person companies (where the worker takes their money through dividends and the company receives a fee for its services) are no longer viable options under the MSC rules.

The effect of the legislation is that the ‘service company’ will be classed as an MSC and the ‘administration company’ will be the MSC provider.

The risks associated with Managed Service Companies are far reaching and as such it is important you do not inadvertently make yourself or your company liable. The legislation means income generated by a MSC would all be treated as employment income and the MSC would primarily be responsible for all unpaid tax and national insurance contributions. If however the MSC cannot pay the monies due, the liability could easily be transferred under the transfer of debt rules.

The Transfer of Debt rules came into force in January 2008 and effectively mean HMRC are entitled to pursue anyone involved with the MSC; this is not just in reference to other companies but includes, directors, office holders or associates of such companies.

Going forward
Workers can still provide their services through commercial contractors (as a self employed individual) or umbrella companies (as an employee) without being caught by the MSC Rules (and genuine one man band limited company contractors are not the target of these rules).