MSC Legislation

The Managed Service Company (“MSC”) legislation was introduced in the 2007 budget, by the then Chancellor of the Exchequer - Gordon Brown. This was the latest piece of legislation to restrict workers from gaining a tax advantage from working via a Limited Company, in this instance, where they do not manage the Company themselves; rather, they use a Managed Service Company Provider to manage the company for them.

The legislation dictates that where a Company or individual is involved with a MSC, that is; it Promotes or Facilitates the use of Companies to provide the services of individual workers to clients, then the income paid to those workers must be under the full deduction of PAYE and National Insurance. In addition individuals providing their services through such a MSC are restricted from claiming any business related expenses, thereby removing any available financial benefit. In short, since the introduction of the MSC legislation it is now against the law for a worker to receive dividend payments from a Company that provides the workers services unless the worker actually controls and manages that Company.

To ensure the effectiveness of the MSC legislation, the UK Government also introduced the Transfer of PAYE and National Insurance Debt legislation, which gave them the ability to pursue any unpaid Tax and National Insurance from not only the MSC itself, but the MSC’s Director/s, and any other party that had been involved with that Company, including any MSC Providers, the Directors of such MSC Providers and potentially any recruitment company which has actively Promoted or Facilitated the use of such MSC’s.

The legislation has been written very broadly to ensure that it captures any and all MSC’s and their Providers, a Company being defined as a MSC if:

Its business consists wholly or mainly of providing (directly or indirectly) the services of an individual to other persons;
Payments are made (directly or indirectly) to the individual (or associates of the individual) of an amount equal to the greater part or all of the consideration for the provision of the services;
The way in which those payments are made would result in the individual (or associates) receiving payments of an amount (net of tax and National Insurance) that is greater than if every payment in respect of the services were employment income of the individual, 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 four of the above definitions must be fulfilled for a Company to be deemed to be a MSC.

Conversely for a Company or individual, that Promotes or Facilitates the use of companies to provide the services of individuals, to be deemed to be a MSC Provider, only one of the following five definitions need be fulfilled, that the Company:

Benefits financially on an ongoing basis from the provision of the services of the individual;
Influences or controls the provision of those services;
Influences or controls the way in which payments to the individual (or associates of the individual) are made;
Influences or controls the Company’s finances or any of its activities; or
Gives or promotes an undertaking to make good any tax loss.

Although the above definitions are very broad and designed to ensure they catch all MSC’s, the legislation has provided exemptions to Companies and individuals who provide Legal or Accountancy services in a professional capacity. In addition Umbrella Companies who pay their employees under full deduction of PAYE and National Insurance, after allowing for any genuine business expenses, are exempt from the legislation, as workers do not receive payment greater than if they were employed directly by a client employer.

Limited Companies

Because a Limited Company is a legal structure, Directors of Limited Companies must ensure compliance with numerous pieces of legislation, not least the Companies Act and Tax and National insurance Acts. The legal obligations on both a Limited Company and its Directors are complex and failing to fulfill those obligations can result in significant penalties from both Companies House and HMRC.

Prior to considering incorporating a Limited Company you should ensure that you are fully aware of what is involved and that you are fully in control of the business. Most businesses would expect to use an Accountant or Legal Adviser, but these advisers should only respond to your requests, they should not tell you how to run your business or be involved in making payments to you from your own company.

Before you incorporate

You should ensure the following before incorporating a limited company:
that you will be the controlling director of your company;
that you will be the signatory on the Company bank account and will be responsible for making payments on behalf of the company;
that you, as director, will sign any contracts that your company undertakes;
that you will keep records of your company’s trading invoices and purchases;
that if you use a professional adviser, they only provide the professional services that you request and that they are not involved in managing your company or making payments either on behalf of the company or to you;
that you have a formal agreement in place with your professional advisor and that their fees are based on the market rate for the services they provide, not on the level of income your company receives.

Following these brief guidelines should keep you safe from any risk from the MSC legislation.

However, whilst working through your own company, IR35 legislation will need to be considered for each assignment that you undertake. Please see our IR35 guidance for more information on how this affects you.

ICS Accounting Limited are an Accountancy Firm who are experts in the field of MSC legislation, you can find out more about the services that they offer by clicking here http://www.icsaccounting.co.uk or email them (JavaScript must be enabled to view this email address) to contact one of their advisors directly.

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