A Contractor's Guide to Managed Service Companies (MSCs)

In the Budget of 2007 the Government introduced legislation to combat the perceived tax avoidance involving the arrangement whereby a company is managed by a Managed Service Provider (MSP).

What is a MSC?

A MSC is basically a Personal Service Company (PSC) with a MSP involved. The Personal Service Company does not have to be a limited company but can be a partnership or a limited liability partnership.

What is a MSP?

A MSP is defined by legislation as being “a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals”.

Being a MSP is not enough to cause this legislation to react. A MSP (or the MSP’s associate) has to be involved with its client, the MSC.

HMRC has provided examples of who is and who is not an MSP. The following are not MSPs:

• Accountants carrying on a normal accountancy business regardless of the percentage of the client base which is individuals operating through service companies.
• A tax adviser carrying on the general business of providing tax advice.
• A company formation agent.
• A chartered secretary.
• An employment business/agency undertaking its core business of placing workers (including those operating through PSCs).
• Service Providers providing services to companies generally, e.g. insurance companies, payroll bureaux etc.
• A trade association operating in the service sector.

The following are MSPs:

• A Service Provider carrying on a business specifically of marketing and/or providing corporate solutions and services to contractors.
• A firm of accountants carrying on a discernable part of their business specifically to market and/or provide corporate solutions and services to contractors.
• A business that presents the façade of being a Tax Adviser, Service Provider etc but which specifically markets corporate solutions and services to contractors.
  

How will I know if the MSP is involved with my company?

For a MSP to be involved with its client, the legislation only requires one of the following five activities to be present:

1. Benefiting financially on an ongoing basis from the provision of services of the individual who provides those services through a PSC. The typical scenario that HMRC have in mind is where the MSP’s fee is based on a percentage of the PSC’s invoice rather than charging a flat fee.
2. Influencing or controlling the provision of the services of the worker, e.g. dictating/determining the contractual terms under which the worker provides their services.
3. Influencing or controlling the way in which payments to the worker or an associate are made. It should be the PSC’s officers who determine how they wish to extract income from their companies.
4. Influencing or controlling the company’s finances or any of its activities. This factor is the one that has caused the most discussion as it essentially refers to the control of the company’s bank account. HMRC’s current view is that if anaMSP does more than view financial information of the PSC client then that will amount to control.
5. Giving or promoting an undertaking to make good any tax loss, e.g insurance such as TLC. This does not affect Qdos Consulting, as we are not a MSP, so contractors are at liberty to purchase such insurances direct from Qdos.
   

What kind of services do not constitute being involved?

HMRC will not provide an inexhaustible list of such services but in their Guidance of July 2007 they did indicate some of the services that MSPs can provide that do not amount to involvement:

• Company formation and set up.
• Acting as the client company’s Registered Office.
• Registering companies for VAT, Corporation Tax and PAYE.
• Preparing VAT, tax and PAYE returns.
• IR35 advice.
• Tailored tax advice re remuneration structures.
• Advising on expenses claims.
• Preparing invoices.
• Submitting invoices to clients of a company.
• Operating payroll.
• Preparing accounts and financial statements.
• Company secretarial services but not acting as Company Secretary.
• Providing insurances such as Employers and Public Liability but not tax loss insurance.

What kind of services will amount to involvement?

Again, HMRC has only provided a snap shot of the services that will definitely be considered involvement on the MSP’s part:

• Providing a standardised corporate solution package other than one where all the income of the worker has PAYE and NIC applied to it.
• Being a director of client companies.
• Being a company secretary of client companies.
• Managing the company bank account or the client company’s finances through a separate account.
• Charging fees on the number of invoices raised/payroll runs.
  

I rely on my MSP to calculate, set aside and pay my company’s taxes on time. Will this be seen as involvement?

This will depend as to exactly how your company funds are transferred and the degree of control that is truly exercised by you over your company’s funds. For example, if tax provisions are held in a MSP controlled bank account and the MSP retains any accumulated interest then it is likely that the MSP will be involved.

Who are classed as associates of an MSP?

To be an associate of a MSP a person must act in concert with the MSP for the purpose of securing that the contractor’s services are provided by a company. Examples of associates would be:

• An employment business or agency demonstrably in business solely or mainly to place the client companies of an MSP with end clients.
• A book-keeping service demonstrably in business to provide services solely or mainly to the client companies of an MSP.
  

Those not deemed associates would include:

• An insurance company or broker, as part of a wider business of providing insurance, providing insurance to MSP clients.
• An employment business or agency, as part of its normal wider business of placing work seekers with end clients, places the MSP clients with end clients.
• A Payroll Bureaux which, as part of its wider business of operating payrolls for clients, operates payrolls for a MSP’s clients.
  

What are the consequences of being an MSC?

If your company is deemed by the legislation to be an MSC then, all the income your company receives from 6 April 2007 will be classified as employment income and therefore PAYE and NICs will have to be paid on such. Although certain expenses are allowed to be set off against this income they are not as favourable as they are when calculating the IR35 deemed payment. A lot of travel and subsistence expenses will not be deductible.

What happens if my company cannot pay the tax owed?

The legislation provides for the debt to be transferred to the following and the money collected from them:

1. Director, or other office holder or associate of the MSC.
2. MSP, or the director, or office holder or associate of the MSP.
3. Any third party that has directly or indirectly encouraged or been actively involved in the provision of the services by the MSC.
   

How can I be certain that my company is not a MSC?

If you have any concerns that the MSC legislation may apply to you, then you should initially talk to your MSP and ask them to specifically explain why they believe your company is not a MSC. Should you also require an independent and expert opinion then we recommend that you contact Qdos Consulting.