Budget 2007: Managed service companies – The end of the road? By Rebecca Benneyworthby
The Budget brought the next phase in the Government’s move against the managed service company (MSC) sector. With veiled comments in the Red Book about “the withdrawal of labour income as dividends”, probably addressing the tax motivated incorporation of service based businesses, the big guns are reserved for what HMRC clearly sees as the “worst offenders”.
Since the publication of draft measures in the Pre Budget Report in December, much thought (and not a little action) has clearly been put in on both sides to wrestle with this problem. The broad thrust of the planned legislation remains the same – to identify Managed Service Companies and then tax their income as employment income.
However, since the draft legislation was released the tax profession has highlighted a number of difficulties with the definitions as drafted. There was a very real risk that if these could catch many more than the intended targets, and the tax outcome for those innocent parties caught by the legislation is punitive indeed. There are also perceived difficulties with the legislation intended to drive home liabilities by making certain third parties responsible for the tax debts of managed service companies unable to meet the liabilities under the new legislation.
The Budget brings another “stab” at the outcome, although full draft legislation is not yet available. The plans now include the following modifications to the original proposals:
- Defining target companies (MSC’s) by reference to the scheme provider as well as by reference to the behaviour of the company itself. This deals with the response of the sector to the original legislation which could simply be defeated by transferring workers in composite companies with no responsibility for management of the company into Personal Service Companies (PSC’s) of which they stand as director. Incorporation statistics indicate that there has been significant movement in this direction during January and February 2007. Once an MSC scheme provider has been identified, all companies made available by that person will be within the new rules.
- Scheme providers will be defined broadly as including businesses which are involved in the promoting or facilitating the use of companies to provide the services of individuals.
- The legislation to transfer the liability to a third party will be delayed to give adequate time for all aspects to be considered. It is likely that this will eventually apply to tax liabilities arising from 1 January 2008. Directors of the MSC will be a nominated third party for this purpose, as will the MSC scheme provider, and their associates, and anyone else who has directly or indirectly encouraged, facilitated or actively been involved in the provision of services of individuals through MSC’s.
- Firms of accountants providing accountancy or legal services, and employment agencies will be excluded from the new rules, and thus cannot be classified either as scheme providers, or “third parties” for the transfer of liability legislation.