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Tackling Managed Service Companies: HMRC launch further consultation

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9th Feb 2007
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In preparation for its proposals for a new managed service company (MSC) tax regime in the 2007 Finance Bill, HMRC has launched an addition to its December 2006 consultation on "Takling Managed Service Companies". The additional draft legislation just published allows the PAYE debts of MSCs to be transferred to appropriate third parties.

HMRC's objections to MSC schemes are basically that they have allowed workers involved to avoid tax and NI on income which due to the underlying nature of individual’s contract should be taxed as employment income. HMRC believe that most workers who supply their services via MSCs should be with the intermediaries legislation – IR35. However, they suggest that MSCs are not following the rules and as the contract-by-contract approach required to determine whether or not a worker in within IR35 by the legislation is very resource intensive HMRC do not have the resources to examine every worker in every MSC. Workers in MSCs additionally benefit from tax free travel

HMRC say that MSCs are phoenixing (closing down and setting up again) to avoid liabilities when they are examined, and also branching out into LLP status, which avoids employers NI and gives more favourable deductions for expenses.

The draft proposals are therefore to:

  • oblige the MSC to operate PAYE and NI
  • apply rules to curtail tax relief for travel expenses
  • allowing the recovery of MSCs tax debts from appropriate third parties where
    the MSC does not pay.

A key feature of any new legislation is that it has to target the right type of business, and so part of the consultation paper is to ensure that as far as possible that the proposed definition of an MSC is clear. HMRC identify that MSC scheme providers create the structure by which the MSC operates and fully control day to day finance and management. It is significant that the worker has no financial or management control over the MSC.

The consultation paper attempts to define a scheme or arrangement covered by the MSC by seeing if it fulfils four criteria:

  1. the services of workers are provided by companies to others;
  2. the majority of the money earned by the worker for their services provided through the company is paid to the worker;
  3. a person termed the “scheme provider” (or their associate) exercises control over the company’s finances or general management; and
  4. the workers whose services are being provided do not exercise control.

“Company” is defined as meaning a company or partnership of whatever description, and the definition of MSCs is not intended to include Personal Service Companies.

Comment: Assessment of the long term effects of the new rules.
HMRC estimate that 90% of the workers who would be affected will go and work for normal employment agencies. Their earnings will then be under PAYE and their travel rules the same as other agency workers. Given that there are “tens of thousands” of workers currently employed by MSCs this means that a significant number of workers will resort back to the use of personal service companies and it is not clear how HMRC propose to deal with the ensuing problems with the intermediaries legislation.

HMRC are seeking responses by 2 March 2007.

By Nichola Ross Martin

HMRC papers: Managed service companies

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Replies (3)

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By AnonymousUser
09th Feb 2007 16:20

Comment ....
Exactly the point I made in my own post - given that IR35 compliance is so poor at present, just how does the Government think the new MSC rules will be of any benefit? In particular, the transfer of debt provisions appear to be meaningless since, as has been pointed out, MSCs will virtually cease to exist. If they go, the debt provisions (which apply only to MSCs) go as well! It seems that the MSC legislation will then exist solely as a deterrent, which has the same effect as saying that MSCs are illegal. It becomes obvious as I type therefore that the Government is not seeking to collect the correct amount of tax etc from those companies, it is setting out to wipe them from the face of the earth. Once the workers are then all in the same IR35 barrel, perhaps we'll see a more determined enforcement regime.

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By mikewhit
12th Feb 2007 14:10

"HMRC believe ..."
I am reminded of a deflated balloon being squeezed in the fist - it just pops out somewhere else !

The clients of MSCs are principally self-employed -or would be if not prevented from acting as such by agencies with an eye on the PAYE legislation.

IR35 squeezed in one place, this is now squeezing in another - or trying to do. When it pops out somewhere else again, what will get squeezed next ?

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By nmmattison.co.uk
13th Feb 2007 17:44

Why doesn't Gordon Brown have to face questions on this baloney
I am surprised that the Big 4 have not been up in arms about this.

It is crazy legislation. They used the excuse that all contractors were criminals are criminals to introduce IR35 and now they are telluing us the same. The Treasury claim they will collect £1billion extra from these measures but offer no scrap of evidence to support that. It is all just the usual paranoid ramblings of the Treasury - a bit like its master Gordon Brown.

Everyone will just set up as their own company if they can't be in an MSC. It will mean more in admin for contractors but hardly a penny more for the Treasury. Why doesn't Gordon Brown himself explain the logic of this move?

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