Understanding MSC Legislation

Introduction:

The Managed Service Companies Regulations are very detailed and complex rules and HMRC have published a number of guides which outline their interpretation of these HERE (https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm3500 ).

This article is designed to provide a summary of the main content of these initial guides to ensure that our existing clients are well informed, and provide some comfort that our firm, as a responsible accounting and taxation services provider for the SME sector, understands the basis on which these rules are applied and has taken steps to ensure compliance.

WHAT IS A MANAGED SERVICE COMPANY (MSC)?

The MSC legislation was introduced with effect from 6th April 2007, and it defines an MSC entity to be a company which fulfils ALL of the following four conditions:

1. The company’s business must consist wholly or mainly of providing, directly or indirectly, services of an individual to third party clients.
2. The individual (worker) supplying their services to the third-party client receives payments (or an aggregate of payments and benefits) from the service company equal to the greater part of the sums received by the service company from the client for the services provided by the worker.
3. The payments received by the worker are greater than they would have received if all of the payments were treated as employment income of the worker relating to an employment with the service company.
4. there must be a person termed an “MSC Provider”, and that person must be “involved” with the company.

In summary, the implication from the above rules is that the legislation is targeting Personal Service Companies (PSCs), where these companies are effectively managed by an external party.  The sole shareholder / director / employee is therefore enjoying the taxation benefits of operating via a limited company structure without the associated responsibility of managing and controlling that company themselves.

WHAT IS A MANAGED SERVICE COMPANY PROVIDER (MSCP)?

An MSC Provider has been defined to be: A service provider who is carrying on a business of “promoting” or “facilitating” the use of companies to provide the services of individuals.

And within this context:

• Promoting – Effectively means: specifically advertising or promoting the use of Manged Service Company products / services.
• Facilitating – The definition of facilitating appears to be more widely applied to be “helping” with the provision of Manged Service Company products / services.

So the net has been cast pretty widely, certainly the word “facilitating”, applies to pretty much any service company.  After all, if the services you receive were not helpful or of value, then you wouldn’t pay for them.  Whereas with respect to “promotion”, there clearly has to be a discernible effort on behalf of the service provider to specifically market the service.

It should be noted that providing legal or accountancy services in a professional capacity is specifically exempt, providing that the persons are professionally qualified accountants or training to be.  At QA our staff range in experience from fully qualified (with practicing certificate), qualified, part qualified, and support staff to provide a cost-effective mix of CCAB professionally qualified experience and cost-effective service quality.

Nevertheless, as an accountant the scope of services you provide to clients, and the method by which you advertise or promote these is important.

Thankfully HMRC have provided some more specific guidance examples about what is and is not considered an MSC Provider.

The following ARE NOT considered to be an MSC Provider:

• A firm of accountants carrying on their business (irrespective of the percentage of the client base which have individuals operating through service companies)
• A tax advisor carrying on their business
• A Company Formation Agent
• A Chartered Secretary
• An Employment Business/Agency undertaking their core business of placing workers (including those operating through companies)
• Service providers providing services to companies generally, for example: insurance companies, payroll bureaux, etc.
• A Trade Association operating in the service sector

The following ARE considered to be an MSC Provider:

• A firm of accountants who specifically markets and/or provides MSC services to a discernible part of their business (In this case the firm would only be an MSC Provider in respect of that discernible part of the business.)
• A Tax Advisor or any other service provider who specifically markets and/or provides MSC services.

Based on the above examples the provision of accountancy and tax services in general is not in breach of the regulations.  The important aspect is not actively marketing or promoting MSC services and ensuring that the scope of services provided is not classified as being “involved”.

SO WHAT IS BEING INVOLVED?

The legislation has defined being “Involved” as being ANY of the following five activities:

1. Benefiting financially on an ongoing basis from the provision of the services of the individual who provides those services through an MSC – It is therefore important that the fees charged to clients are based purely on the scope of services provided and not directly linked to the income, financial success, or activities of the client.  At QA we operate a quote engine which determines the fees for each client on a bespoke basis tailoring to the scope of services to what is required and has been requested by the client.
2. Influencing or controlling the provision of the services of the worker – At QA we only have visibility of service contracts where this is required by virtue of a client commissioning our invoicing service.
3. Influencing or controlling the way in which payments to the worker or an associate are made – The company’s officers should determine how the company distributes its profits.  At QA we undertake an annual tax planning process with each of our clients, where clients consider their options, and then instruct us what annual or other salary structure should be applied for each of their staff.  Any other profit distributions are only advised to us and processed after they are paid, following the supply of relevant source documents by the client.
4. Influencing or controlling the company’s finances or any of its activities – A company’s officers should, independently of any external influence, determine how the company and its finances are administered. Such decisions should have regard to all the relevant factors pertinent to the company and to the company officers’ legal obligations.  At QA we provide valuable professional accountancy and tax advice to allow our clients to make informed decisions themselves and effectively manage their own client entities irrespective of legal structure.
5. Giving or promoting an undertaking to make good any tax loss – Following April 2007, service providers or associates who sell or promote tax loss insurance will be deemed to be MSC Providers.    QA is an appointed representative of QDOS Broker & Underwriting Services Ltd, which is authorised and regulated by the Financial Conduct Authority to sell business insurances for the convenience and benefit of our clients. Nevertheless, we do not allow the sale or promotion of any form of tax loss insurance.  All clients are fully responsible for the tax liabilities of their own legal entities.  Furthermore, we operate strict internal compliance procedures whereby we will consider the suspension of services to clients in those instances where there are overdue taxes for which they are unwilling to seek a payment agreement with HMRC.

Note – It is specifically clarified that the word “influences” does not mean the provision of professional advice which is tailored to clients.

Thankfully HMRC have provided some more specific guidance examples about what is and is not considered to be involved.

The following ARE NOT considered to be “involved”, providing in most cases that the client has requested these services, or that they are provided on the basis of tailored advice:

• Company formation services
• Providing registered office address (ROA) services
• Registering companies for VAT, CT, and PAYE – This is considered to be a pure Administration function
• Preparing VAT, CT, and PAYE returns
• Providing IR35 advice
• Advising on remuneration
• Advising on expense claims
• Preparing and submitting invoices to end clients
• Operating payroll and preparing associated payroll submissions
• Preparing management accounts and financial statements
• Providing company secretarial services such as: minutes, confirmation statements, etc
• Providing non-tax loss business insurances

The following ARE considered to be “involved”:

• Providing a standardised corporate solution package, unless all income is subject to full employment taxes (e.g. Umbrella companies)
• Being a director of a client company
• Being the company secretary of a client company
• Managing the company bank account or the company’s finances through a separate account
• Charging fees based on the number of invoices raised / payroll runs.

CONSEQUENES OF BREACHING THE RULES

The consequences of being found in breach of the MSC legislation can be very severe and this applies to both the client companies which are deemed to be Managed Service Companies and also the service companies where are deemed to be Managed Service Providers.

From the perspective of the Managed Service Company: All amounts received by the shareholder / director through their company are deemed to be employment income, potentially subject to additional PAYE and National Insurance, depending on the method of previous withdrawal, and offsetting any taxes already paid.

From the perspective of the Managed Service Company Provider: There is a risk that any taxes which cannot be recovered from the MSC can instead be levied, by the use of debt transfer provisions, onto the MSCP instead or the company Directors.  Furthermore, any challenges brought by HMRC can be severely damaging to the business itself, in terms of reputational damage and their subsequent ability to both retain existing clients and attract new clients.

So there are very significant incentives to ensure that both accounting firms and their clients are operating compliantly.

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