How sure are you that your company is not a Managed Service Company (MSC)?

Intermediary companies claiming not to be MSCs

Since the introduction of the Managed Service Company legislation (Chapter 9, Part 2, Income Tax (Earnings and Pensions) Act 2003) with effect from April 2007, HM Revenue & Customs (HMRC) has seen a growth in intermediary companies which are marketed to individuals for the provision of their services to clients.

These companies are being marketed to a wide range of workers in various sectors and are based both in the UK and overseas.

The companies claim that they are not MSCs, usually by virtue of the fact that the provider of the intermediary is an officer or partner of the intermediary and that consequently as there is no separate MSC Provider, the MSC legislation does not apply.

HMRC's position

HMRC has now considered fully the arguments advanced by these intermediaries as to why they are not MSCs. Having taken counsel's advice, HMRC has come to a view on the nature of the intermediaries. HMRC's position is that being an officer/partner in a service company does not preclude that person from being an MSC Provider.

HMRC considers that companies and partnerships which otherwise fall within the Managed Service Company legislation (that is, fulfil the criteria of Chapter 9 ITEPA), but claim not to be MSCs because the provider is an officer/partner of the intermediary, are MSCs.

HMRC will now look for suitable cases to investigate and, where appropriate, challenge and litigate. HMRC is aware that some Service Providers claim to be in receipt of counsel's opinion that their particular intermediary does not fall within the Managed Service Company legislation. Such opinions do not alter HMRC's view regarding whether or not the Managed Service Company legislation applies.

Consequences for individuals, intermediary providers and third parties

Where HMRC challenges successfully a company as being within the Managed Service Company legislation and that company is unable to pay the resultant PAYE and National Insurance debt, HMRC will invoke the transfer of debt provisions.

Section 688A, Part 11 ITEPA provides for the transfer of debts of MSCs to a number of specified parties where the debts of the MSC are irrecoverable from the company. Providers of such companies, their associates and individuals providing their services through such companies will be those most at risk from the transfer of debt provisions.

It should be noted that simply because an intermediary is based outside the UK does not mean the Managed Service Company legislation does not apply. Those providing their services though companies based outside the UK should not assume that this fact alone exempts their company from the legislation and them from the consequences of non-compliance. If the provider and their associates are based outside of the UK tax jurisdiction, then the persons most at risk are individual workers based in the UK.

Are you sure of the Construction Industry Scheme status of the construction intermediary you are paying?

Intermediary companies operating in the construction sector

The growth in intermediary companies marketed to individuals for the provision of their services to clients is prevalent in the construction sector. These companies interpose themselves between the worker and payer (usually an Employment Business) so enabling the worker to claim to have 'self-employed' status.

Such intermediary companies may be MSC since many claim not to be MSCs by virtue of there being no separate MSC Provider (see above). Irrespective of whether the intermediary is or is not a MSC, payers (including Employment Businesses and main contractors) need to understand that there are specific Construction Industry Scheme (CIS) issues which must be considered when paying an intermediary.

Such intermediaries invariably have gross payment status under CIS and those who pay such intermediaries are determining the intermediary's CIS status and paying them accordingly.

Depending on the contractual relationship between the parties and the true nature of the services provided by the intermediary, the intermediary may not be a contractor within the meaning of CIS legislation, rather they may simply be a nominee of the worker. Where the intermediary is a nominee, both the intermediary and the worker must have gross payment status in order for payments to be made gross.

Payers are reminded that where they are operating in the construction sector, including providing labour, and are therefore a contractor for the purposes of CIS, they must ensure that they correctly establish their contractual relationships with intermediaries and workers in order to decide whether they are paying a contractor or nominee. They must then ensure that payments are properly made in accordance with the legislative provisions of CIS , that is, that payments are only made gross where all relevant parties hold gross payment status.