Details

When did the legislation take effect?

From 6 April 2007 for tax and from 6 August 2007 for Class 1 National Insurance contributions (NICs). The transfer of debt provisions initially took effect from 6 August 2007 for MSC Providers and directors of MSCs. Other third parties were liable for debts from 6 January 2008.

Who is affected?

Primarily individuals who provide their services through Managed Service Companies, since the legislation concerns the taxation of income received by such persons.

But the legislation also affects persons who make Managed Service Companies available (MSC Providers) and under certain circumstances other third parties involved with MSCs.

Where a Managed Service Company is unable to pay its PAYE and NICs liability, its debt can be transferred to third parties including initially the MSC's directors and the MSC Provider.

Who is not affected?

Individuals working through Personal Service Companies (PSC) that are not within the new definition of a MSC.

Individuals working through Umbrella Companies.

What is a Managed Service Company (MSC)?

An MSC is a form of intermediary company through which workers provide their services to end clients. The definition of an 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 (although a shareholder) does not exercise control over the company.

What does the legislation do?

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

This means that PAYE and NICs must be applied to all income received by individuals in MSCs in relation to their services provided through the MSC.

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 (UK) 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 an 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.

MSC providers

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 an MSC Provider.

Individuals operating through service companies, particularly those who believe that prior to 6 April 2007 they would have been within 'IR35', should consider carefully their and their company's relationship with the MSC Provider. If a service company is within the 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.