The Managed Service Company Legislation was created to combat the use of so-called ‘composite companies’ – particularly by professional contractors – in the early 2000s.
If an accountant or other adviser has excessive control over or involvement in the operation of its clients’ companies, advisers and directors alike could fall foul of the MSC rules.
Although HMRC activity around the MSC legislation has been very low key over the past 15 years, recent investigations into the practices of two accountancy firms has sparked concern within the contracting sector, in particular.
Why was the MSC Legislation created?
In the early 2000s, the use of composite companies became widespread within the professional contracting industry.
This type of arrangement would provide clients with all the tax benefits of operating via a limited company, without having to take on any of the administrative or statutory duties associated with being a director.
Although the controversial IR35 legislation, introduced in 2000, had reduced the number of individuals who were deemed to be ‘disguised employees’ (i.e. working via a limited company but working in the same way as an employee), the tax authorities believed that there was widespread non-compliance with IR35.
The result was the creation of the MSC Legislation, introduced in 2007.
Like IR35, if an individual is classed as an MSC, then all of their employment income will be subject to PAYE.
The legislation has draconian debt transfer rules too – which means that if any liabilities cannot be repaid by the MSC, HMRC can pursue other businesses in the employment chain.
One of the most important factors in deciding whether or not a company is an MSC is the existence of an MSC Provider (MSCP) – such as an overly-involved accountant.
What is a Managed Service Company Provider (MSCP)?
For an accountant (or other service provider) to be an MSCP, they must be “promoting or facilitating” the use of limited companies which provide the services of an individual. They must also be “involved” with the company.
The definition of an MSCP is one that;
- benefits financially on an ongoing basis from the provision of the services of the individual (receives income from the client company).
- influences or controls the provision of those services (e.g. provides a registered address, company secretary, decides upon company structure, etc.)
- influences or controls the way in which payments to the individual (or associates of the individual) are made (e.g. works out the best salary/dividend split, how and when to make payments).
- influences or controls the company’s finances or any of its activities (controls any of the client’s funds, such as tax liabilties, or even has access to the client’s bank accounts).
- gives or promotes an undertaking to make good any tax loss. (provides a guarantee to make good any losses resulting from a tax investigation into the MSCP business model).
If a service provider meets one or more of these points, they might be in danger of being classified as an MSCP.
What is a Managed Service Company (MSC)?
According to the legislation, a company is an MSC if:
- the main purpose of the business is to provide personal services to third parties (e.g. working as a professional contractor for end-clients).
- payments are made to the individual (or associates) for work done.
- the amount of payments is higher than would be the case under traditional PAYE employment.
- a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals (“an MSC provider”) is involved with the company.
If your company is deemed to be an MSC, then all company income will be re-classified as employment income, and subject to standard PAYE deductions.
What is the link between IR35 and the MSC rules?
There is no link between the MSC rules and the IR35 legislation, although the result of being caught by either set of rules is the same for the worker; all relevant company income will be re-classified and taxed as employment income.
2022 – HMRC launches new MSC investigations
Aside from an easy win at the Court of Appeal (the Costelloe Business Services Ltd case), HMRC activity around the MSC rules has been distinctly muted since the legislation was first implemented in 2007.
However, in 2022, thousands of clients of two specialist limited company accountancy providers received Notice of Regulation 80 determination letters from HMRC, after their accountants had been deemed to be MSCPs.
As a result of the acccountants being deemed to be MSCPs, their limited company clients have also been deemed to be MSCs.
HMRC has only 4 years from the end of a given tax year to recover any unpaid taxes. As a result, this batch of determination letters have been issued to protect potential tax revenues from the 2017-18 tax year.
It seems possible that further determination notices will be sent for subsequent tax years, depending on the status of the HMRC investigation.
What should you do if you receive a determination letter from HMRC?
- If you have tax investigation insurance, check with your provider to see if your policy covers the MSC legislation.
- Make sure you make a formal appeal within 30 days from the date of the letter. HMRC are not obliged to accept appeals received after this deadline. The contact details will be on the letter.
- Make sure you have all of your tax records and documents to hand which relate to the period in question.
- Seek independent professional advice to ensure you have the best chance of removing your company from HMRC’s probe. If your accountant is deemed to be an MSCP, there may be a conflict of interest if they offer to help you with your own appeal.
- Research news and posts on specialist contractor sites (see below) to find out the status of the current investigations, read the views of other company owners who are caught, and access specialist advisors.
Further help and resources
Here are some useful links to help if you have been affected by the recent HMRC investigations:
- MSC Survivors Group – set up to pool resources to pay for experienced tax assistance.
- IPSE’s MSC guide and specific advice if you have received a determination letter.
- Thread on Contractor UK forum specifically dealing with the current HMRC MSC investigations.
- Qdos (leading tax consultancy) – what to do if HMRC contacts you over an MSC claim.