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HMRC internal manual

Employment Status Manual

From
HM Revenue & Customs
Updated
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Managed Service Companies (MSC): Introduction and background

Legislation

Chapter 9, Part 2, Income Tax (Earnings and Pensions) Act 2003

Chapter 3, Part 11, Section 688A, Income Tax (Earnings and Pensions) Act 2003

Chapter 4, Regulations 97A to 97X, Income Tax (PAYE) Regulations 2003

Social Security Contributions (Managed Service Companies) Regulations 2007

The Service Company Unit (SCU)

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)
(This content has been withheld because of exemptions in the Freedom of Information Act 2000)
(This content has been withheld because of exemptions in the Freedom of Information Act 2000)
(This content has been withheld because of exemptions in the Freedom of Information Act 2000)
(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

What is a MSC?

The MSC legislation was introduced with effect from 6 April 2007.

A MSC is a form of intermediary company through which workers provide their services to end clients. The definition of a MSC in the legislation encompasses both ‘composites’ and ‘managed personal service companies’.

In essence, a scheme provider promotes the use of these companies and provides the structure to workers. The worker, despite being a shareholder (or partner), does not exercise control over the company.

What does the legislation do?

The legislation applies to individuals providing their services through intermediaries which meet the definition of a MSC.

It deems all payments received by a worker working through a MSC to be employment income.

This means all payments received by individuals providing their services through MSCs are subject to PAYE for tax and National Insurance contributions (NICs).

The legislation applies whether the remuneration is received directly or indirectly and whatever the form in which it is received by the worker.

The legislation also applies whether the MSC is based within the United Kingdom or outside the UK. If the MSC is based outside the UK for the purpose of seeking to avoid the legislation, there is a greater likelihood that HMRC will invoke the transfer of debt provisions.

Where a MSC is unable to pay its PAYE and NICs liability, its debt can be transferred to third parties. These include the company’s directors, the MSC Provider, and in certain circumstances, other third parties.

Where the PAYE and NICs debts of a MSC cannot be recovered from the company, HMRC may transfer the debt personally to one of the following:

  • the company’s director
  • the MSC Provider
  • other third parties.

MSC Providers

Key to the legislation is the existence of a MSC Provider involved with a client company. A MSC Provider is defined as “a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals.” “Involved” is defined by reference to any one of five activities.

Service Providers who specialise in providing services to persons providing their services through companies are likely to fulfil the definition of a MSC Provider. Being a MSC Provider does not in itself mean that client companies are MSCs and that the MSC legislation applies. For the MSC legislation to apply, the service provider must both fulfil the definition of a MSC Provider and be involved with their client companies.

It is therefore important that persons are able to determine whether:

  • They are a MSC Provider
  • The services provided as a service provider constitute being “involved”
  • A company is a MSC
  • The MSC legislation applies
  • They fall within the transfer of debt provisions and if so how they can mitigate their risk.

It is also important that where a person concludes that the MSC legislation applies, they are clear regarding how to apply the legislation.

A number of Service Providers are telling their clients that they (the Service Providers) are not MSC Providers; rather that they are accountants. They are therefore telling clients that their companies are not caught by the legislation.

Whether or not the tax rules apply will depend on the precise relationship between the MSC Provider and the client company. The fact that a Service Provider holds a professional qualification does not itself mean that they cannot be a MSC Provider.

Individuals operating through service companies, particularly those who believe that prior to 6 April 2007 they would have been within ‘IR35’ (see ESM3000 onwards), should consider carefully their and their company’s relationship with the MSC Provider. If a service company is within the MSC legislation and the company fails to operate PAYE and NICs, this could result in individuals being held personally liable for the PAYE and NICs debts of the company.