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AIA

Are you an MSC provider? By Rebecca Benneyworth

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27th Jul 2007
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HMRC have issued guidance on the MSC legislation, which commenced on 6 April 2007, with further developments expected to be complete by August 5. The legislation is at Schedule 3 of Finance Act 2007, which makes changes principally to ITEPA 2003, by inserting Chapter 9 into Part II of the Act, which falls immediately after the existing intermediaries legislation in Chapter 8.

Chapter 9 creates a tax charge on income regarded as deriving from an employment, which adds amounts treated as earnings of workers provided by managed service companies to the definition of employment income in ITEPA 2003 Section 7(5). Managed service company workers are statutorily excluded from IR35; thus the MSC legislation replaces IR35 for income of affected workers.

An essential component of defining an MSC and thus an MSC worker is the identification of an MSC provider, which must be “involved with” the MSC for the definition to be complete. The definition of an MSC is in four parts :

  • A company whose business consists wholly or mainly of providing the services of an individual to third party clients;
  • The worker providing the services receives payments (including benefits) equal to the greater part of the consideration for the services he has provided;
  • The amount of the payments are greater than he would have received as an employee of the service company, and
  • An MSC provider is Involved with the company.

The first three of these conditions are clear from both the legislation and the guidance provided by HMRC – one point to note is that both conditions two and three are operated on a cumulative rather than payment by payment basis. So the last condition, which is a complex one, is the one that the entire legislation turns upon, as without this we could be considering a simple service company provider which is outside the scope of IR35 and thus the worker / shareholder draws income as dividends.

MSC provider
The term MSC provider is defined in the legislation as follows: “a person who carries on a business of promoting or facilitating the use of companies to provide the service of individuals”. This term is explained on page 8 of the new guidance.

Promoting does not relate to the promoting of the business of the MSC provider directly, but relates to the promotion of a certain type of product – companies providing the services of individuals. Where a business comprises a range of activities, it is the promotion of this “product” or “solution” which will fall within this definition – although this alone is not sufficient to complete the test.

Facilitating is identified as talking its ordinary meaning – such as helping, making easier, enabling. Either promotion or facilitation of service companies will trigger the question of whether someone is an MSC provider.

“Carries on a business” – it is not sufficient that a firm of accountants or advisers either promotes service companies as a packaged solution to clients, or indeed facilitates the use of companies by providing a variety of support services, it is also necessary that the firm “carries on a business” of doing so. Most ordinary firms of accountants could not be said to be carrying on a business of promoting or facilitating this activity, as they have a range of other business activities and a wide range of clients that they service. It is therefore unlikely that such a firm would be within the definition. However, at the foot of page 8 there is a slight extension to this statutory definition – The guidance states that “the test is whether a person is carrying on a business (or a discernable part of their business) of promoting or…”. This is a non statutory extension of what the law says. Some examples follow :

Firm X is a small firm with many service based clients. Several years ago, when the corporation tax nil rate band came in the firm incorporated every small client on their books, after discussing the tax advantages with each of them. The firm now has very few unincorporated businesses indeed – mainly those new business start ups not ready to incorporate, or utilising the opening year loss provisions. Although the firm acts almost exclusively for service companies, mostly providing the services of individuals to their clients, this could still not be said to be “their business”. There is no doubt that although the promotion test would not be satisfied, on an individual client basis they could be said to be facilitating the use of companies to provide the services of individuals. This does not comprise “their business”.

Firm Y have a significant number of service company clients, some caught by IR35, some able to sustain the argument that they are outside the provisions of Chapter 8. As these clients (mainly working in IT and engineering) form such a significant part of the practice, on the conversion of the firm to an LLP some practice reorganisation is carried out. The audit, tax and general client services are transferred to the new LLP and the service company activities to a separate limited company in which the partners are all shareholders. At the point at which the company is set up, and the “part of the business” transferred to it, there is a clear risk that the MSC provider definition would be met but only with regard to this aspect of the business. The rest of the practice would not be affected by the structure, but by separating the service company part of the client base into a separate entity, the firm is likely to be within the definition. There is not much doubt that servicing a client base of this type would fall within the definition of “facilitation”.

Firm Z is very similar to firm Y, but has not taken the step of separating out the activity into a separate company. They still have a very significant band of clients operating through one man companies. They have some other clients, but are not registered auditors, and carry out very little work other than tax and accounting for small businesses. Some 85% of their client income derives from service companies providing the services of individuals to clients. So, does this firm “carry on a business” of facilitating etc, or is this a “discernable part of their business” – the non statutory extension. It is possible that the firm has a problem – of course they would seek to argue not. The guidance on page 9 states that a firm of accountants carrying on the business of being accountants is not an MSC provider “irrespective of the percentage of the client base which is individuals operating through service companies” However, in the examples below of those that are caught by the definition “A firm of accountants carrying on a discernable part of their business specifically to market and/or provide corporate solutions” is caught by the definition.

Summary
Even without the benefit of the professional exemption – dealt with in a separate article – most firms of accountants will not be caught by the definition. Firm Y above would be caught with regard to the separate limited company that they have set up – and if Form X organised their work so as to keep this operation within the firm, but in a separate department doing only that work, it is likely that HMRC would regard them as caught with regard to that part of their business.

The next feature will deal with the “professional exemption” and the term “involved with”. Even if a firm falls within the definition of an MSC provider, they must be “involved with” companies within the statutory definition to trigger the new legislation.

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By ayjay3
31st Jul 2007 15:10

What does this mean in actual practice, in simple English.
Why have so many providers dropped out of this market, leaving only 1 or 2 left? Can someone please explain the problem in simple English.

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