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Knowledge Base

Managed Service Companies (MSC)

02 March, 2009

In December 2006 the Treasury issued a consultative document called Tackling Managed Services Companies. The document set out the ways the Treasury proposed to tax contractors working through Composite Companies in the main.

Composite companies were structures where the contractor was, usually, a worker/shareholder but not a director, therefore had no control over the affairs of the company but received the majority of income from the company as dividends. The Treasury saw this as ‘abuse’ as they considered such workers not to be in business on their own account and decided to clamp down on such schemes and to ensure that, in future, the worker paid PAYE on all the company income, i.e. no dividend payments.

In April 2007 the Finance Bill changed the definition of what constitutes an MSC by widening it to include MSC scheme providers and that could be anyone who, in the words of the Treasury, ‘facilitates or promotes the use of companies’. Potentially, this could mean HMRC classifying Personal Service Companies (PSC) as MSCs and, in certain circumstances, some accountants and agencies being defined as an MSC provider.

The legislation includes a set of rules dealing with Transfer of PAYE and NIC debts. The crucial point is if an MSC fails to pay PAYE on the total earnings then HMRC will look to collect the debt from an appropriate third party, i.e. worker/director of the MSC, the MSC provider or even the agency.

It is clear the contractor market place has changed significantly and in future there will be three ways to operate independently:

Umbrella company

Many agencies are keen for contractors to operate via an umbrella company as there is no risk to the agency from the transfer of debt rules because all income paid to the contractor or consultant is treated as PAYE after consideration of certain business expenses.

It is also a simple and efficient method for contractors as there is virtually no administration and, provided they meet HMRC Temporary Workplace Rules, contractors should be able to claim some business expenses.

However, it is clear that some service companies abuse the expenses rules and, therefore, it is an area the HMRC may focus on in the future.

Your own limited company – commonly called a personal service company (PSC).

PSCs are still the most tax efficient way for contractors and consultants to operate if they are clearly in business on their own account and in control of their company’s management and business affairs. Accountants can only act in a professional capacity providing independent accounting services and advice.

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