Anyone involved in the contractor market will have heard the term ‘MSC’ often enough to realise that it is an important issue to be aware of.
We would like to help clarify the main points of the Managed Service Company (MSC) legislation and how it could impact anyone working with us either as an agency or end client or an employee and member of the Contractor Co-op.
Although it can appear quite complex we think it is important that you are aware of the legislation and have all the facts available easily to hand.
1. Managed Service Company (MSC) Defined
For the MSC legislation to apply the company through which a worker provides their services needs to meet the definition of an MSC. The legislation defines an MSC by reference to the following four conditions:
The company’s business consists mainly of providing the services of individuals to others.
The individual receives payments that represent the majority of the fees received for those services
The way in which the payments are made results in the individual receiving more than if they were taxed as an employee.
A person who carries on a business of promoting or facilitating the use of companies – known as an MSC Provider is involved with the company.
For the company to be classified as an MSC all four conditions must be satisfied.
2. Managed Service Company Provider (MSCP) Defined
An MSCP is defined by HMRC as “a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals and is involved with the company.” In this context, a ‘person’ can be either an individual, a partnership or a company.
The existence of an MSCP does not in itself mean that the MSC legislation applies. The acid test is whether the MSCP is ‘involved’ with the company.
HMRC has identified five ways in which an MSCP can be ‘involved’ and, in general terms they are where the MSCP:
Benefits financially on an ongoing basis from the provision of the services of an individual.
Influences or controls the provision of those services
Influences or controls the way in which payments to the individual are made
Influences or controls the company’s finances or any of its activities.
Gives or promotes an undertaking to make good any tax loss.
3. Exemptions from being defined as an MSCP
There are some specific businesses and individuals that are not considered to be MSCP’s
Persons professionally qualified and regulated by a regulatory body.
A chartered secretary.
An employment business placing work seekers.
Company formation agents.
A firm of accountants or tax advisors (practising).
A trade association.
4. Implications if the Managed Service Companies Legislation applies
In the event that all four of the conditions identified in section 1 above are met, the legislation deems that all payments received by ‘a worker engaged by an MSC’ are employment income. This would mean that PAYE (including deductions for Tax and NIC) must be applied to all the income earned by an employee of the MSC.
In January 2008 the full provisions of the ‘Transfer of Third Party Debt’ regulations were brought into force. This means that where an MSC is unable to pay the Tax and NICs, its debt can be transferred to a third party, such as the Agency or the End Client involved with the facilitating or promoting of such companies. As a result of these regulations, Agencies and End Clients need to be satisfied with regard to the potential impact of the MSC legislation.
5. How the Contractor Co-op is affected by MSC
All employees of the Contractor Co-op, whether they have chosen to become members or not, will receive ALL their income in the form of employment income. As a result, test 3 of the MSC definition will not be satisfied with the result that the Contractor Co-op does not meet the definition of an MSC.
The directors of the Contractor Co-op have considered the MSC legislation in detail and are confident that it does not apply to the provision of services by its employees.
The Contractor Co-op is a wholly compliant employer and therefore does not represent a threat for Agencies or End Clients with regard to the Transfer of Debt regulations.
For more information please call us on 020 3468 0009