Details
When does the legislation take effect?
It will take effect from 6 April 2007 for tax, and is expected to take effect from 6 August 2007 for NICs. The transfer of debt provisions will initially take effect from 6 August 2007 for MSC scheme providers and directors of MSCs. Other third parties may be 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 NIC liability, its debt might be transferred to a third party including initially MSCs’ 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, it is expected, from 6 August 2007, Class 1 National Insurance contributions) must be applied to all income received by individuals in MSCs in relation to their services provided through the MSC.
The legislation applies whatever the form through which the worker receives their remuneration.
Where an MSC is unable to pay its PAYE and NIC liability, its debt can be transferred to a third party. These include the company’s director, the MSC Provider, and in certain circumstances, other third parties.
MSC providers
In response to the legislation published at Budget, a number of providers are telling their clients that they (the providers) are not MSC providers, rather that they are accountants. They are therefore telling clients that their companies are not caught by the legislation.
Based on the advertising material seen, it is HMRC’s view that many of these organisations are MSC providers as defined in the new legislation. Whether or not the new tax rules apply will depend on the precise relationship between the MSC provider and the client company.
Individuals operating through service companies, particularly those who believe that prior to 6 April 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, this could result in individuals being held personally liable for the PAYE debts of the company.
