Managed Service Companies (MSC) Legislation

On 6 April 2007 new Government legislation was introduced to tackle potential tax evasion issues associated with Managed Service Companies (MSCs).  The Government takes the view that contractors working through Managed Service Companies are invariably not genuinely in business on their own account (or are not deemed self employed for tax purposes).  It is estimated that £350 million of tax revenue may have been avoided by falsely claiming "self-employment".

The new legislation requires that Managed Service Companies deduct PAYE tax and National Insurance Contributions on all earnings paid to contractors and to apply the same rules for tax relief on travel expenses as other workers.  Furthermore, if there is a shortfall in PAYE or NIC paid HMRC will have powers to recover the amount from third parties who have been associated with the process.  The first port of call for recovery of unpaid taxes would be with the provider of the Managed Service Company scheme and all directors, office holders or associates - known as First Priority Parties. If unsuccessful through this route HMRC will then pursue Second Priority Parties for recovery of the debt if they have directly or indirectly encouraged an individual worker to utilise a Managed Service Company to minimise tax payments.  From 6 January 2008 this may include employment businesses.

What are the options available to contractors?

There are two remaining options available to contractors for providing their services.  The first and arguably simplest solution is to utilise the services of a reputable Umbrella Company.  Essentially the worker is deemed an employee of the Umbrella Company and is paid a form of salary subject to PAYE tax and National Insurance Contributions (NIC).  Typically the Umbrella Company invoices the employment business and upon receipt of payment, deducts PAYE and NIC before transferring funds directly to the workers bank account. 

Where a relationship between the contractor and the end user is a genuine business service relationship, and would pass the test of self employment for tax purposes (therefore not being caught by IR35) contractors may choose to use a Personal Service Company provided it is in no way involved with a Managed Service Company provider.  In order to be considered a Personal Service Company the following features are likely to apply:

- Small company with the director being the only shareholder (generally with a relative being the company secretary) with the company having its own bank account into which employment businesses pay fees invoiced.  The director is generally the sole signatory on the company bank account and decides on payments themselves.

Whichever method of operation is chosen Limited Company Contractors are advised to seek professional, independent advice. CPC Recruitment Ltd does not encourage use of services which seek to minimise or avoid PAYE tax and NIC.

[DISCLAIMER - This information is provided as a reference guide to the latest developments in the law and their impact on CPC Recruitment Ltd. This information is not intended to provide specific legal advice. You should consult a lawyer with any specific legal questions.]