The Managed Service Company (MSC) legislation is a UK tax legislation (Chapter 9, Part 2 ITEPA 2003) introduced in 2007 to combat perceived tax avoidance by contractors who were enjoying the tax benefits of working through a limited company, but without the responsibility or burden of managing that company.
The MSC legislation works similarly to IR35 in that, if HMRC decides a contractor appears to be a managed service company (MSC), they’ll reclassify all relevant payments received by that contractor as employment income which will be subject to PAYE and NICs, and means they wave goodbye to that tax efficiency.
However, it isn’t only the contractors that can get stung. A contractor must meet certain criteria to be classed as an MSC; the most important of which is the existence of an MSC Provider (MSCP). This is an individual or business that facilitates and benefits from their use, and the broad definition that HMRC uses to define this individual or business can land a specialist contractor accountancy in hot water.
As a contractor accountant, you may have already heard of the MSC legislation and need to figure out whether or not your business is classed as a MSC Provider (MSCP).
ESM3515 states that “an accountancy/tax advisor, whether or not professionally qualified, who provides advice to clients who are service companies is not an MSC Provider merely by virtue of their client base. The test is whether a person is carrying on a business (or a discernible part of their business) of promoting or facilitating the use of companies to provide the services of individuals.”
So the problems come where an accountant promotes or facilitates the use of companies to provide the services of individuals. This includes marketing, encouraging, or initiating the use of these companies.
However, just because you may be classed as an MSCP, it doesn’t mean that all of your PSC clients are by association classed as MSCs. It all depends on whether you, as the MSCP, are classed as ‘involved’ with the company in question. If you aren’t ‘involved’ then the MSC legislation doesn’t apply in that case.
An accountant would be classed as involved if any of the following five circumstances apply:
You financially benefit from the provision of the services of the worker on an ongoing basis.
You influence or control the provision of the services of the worker, such as determining the terms of the work.
You influence or control the way payments are made to the worker or to an associate.
You influence or control the company’s finances or any of its activities.
You provide or promote a way for your clients to make good any tax loss.
Here are some simple examples of the actions of an MSCP that constitute being involved with their service company client, and what wouldn’t indicate an MSCP being involved with their service company client.
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