Do You Know MSC?

The majority of contractors operating via an intermediary such as a limited company, will fall under the IR35 legislation. This legislation is our bread and butter; we eat, sleep and breathe IR35 at Qdos, but sometimes contractors are not captured under IR35, but instead its cousin, the MSC legislation (Managed Service Companies Legislation).

The MSC legislation was brought into play in the 2007 Budget and is essentially an extension of the IR35 legislation in that it affects how your income tax and national insurance contributions are calculated as a self-employed worker operating via an intermediary such as a limited company. If your intermediary company classifies as an MSC (Managed Service Company) then you are subject to the rules of the MSC legislation and must apply PAYE and NICs as if you were an employee of your end client (much like when the IR35 legislation applies), and if your intermediary does not classify as an MSC, then you are subject to the rules of the IR35 legislation as normal. So what classifies an intermediary as an MSC? Well, vital to being classified as an MSC is the involvement of a Managed Service Company Provider (MSCP or MSC Provider), so first we must touch on what one of those is.

What is an MSC Provider?
The official definition for an MSC Provider is “a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals.” This would entail businesses who provide “marketing and/or provide corporate solutions and services to individuals providing their services to end clients”. An accountancy firm who offers such services could be classified as an MSC Provider for example, but it would not apply to the provision of normal accountancy services unless those services were exclusively to those providing their services to end clients (as this would be seen as facilitating the use of such companies). Company formation agents, insurance companies, trade associations and recruitment agencies who are simply placing jobseekers as usual would not be classified as MSC Providers.
In addition to the existence of an MSC Provider, they must also be “involved” with the client company (that’s your company), which is to say that any one of the following can be agreed to:

  1. The MSC Provider benefits financially on an ongoing basis from the services you provide. This refers more to fee structures based on your income as opposed to your repeat business.
  2. The MSC Provider influences (the term used in this list excludes mere advisory) or controls the manner in which you provide your services.
  3. The MSC Provider influences or controls the manner in which you receive payment.
  4. The MSC Provider influences or controls your company’s finances or any of its activities.
  5. The MSC Provider gives or promotes a product or service which makes good a tax loss. This refers quite specifically to insurances which absorb the financial consequences of being caught by the IR35 legislation. Qdos offers such a policy, our ever popular Tax Liability Insurance (TLC35), so it is worth noting here that Qdos does not classify as an MSC Provider (as insurance companies are exempt) and so dealing with Qdos will not put you at risk to the MSC legislation. An accountancy firm promoting this policy however, may well do. The above does not apply to our Freelancer Tax Protection policy which does not “make good a tax loss”.

The provision of a standardised corporate solution package where all payment is not treated as employment income, managing of the company’s finances or bank account through a separate account, charging fees based on the number of invoices raised or acting as the director or company secretary to your company, would all constitute being an involved MSC Provider under all circumstances.

What classifies as an MSC?
Now that we understand what makes an MSC Provider and when they are involved, to be classified as a Managed Service Company and therefore for the MSC legislation to apply, all four of the following conditions must apply:

  1. Your company must provide the services of an individual worker (that’s you) to third party clients.
  2. You must receive the majority of the payment made to your company for the services you provided.
  3. The payment you receive for your services must be greater than if this payment was treated as employment income (i.e. if income tax and Class 1 NICs had been applied as if you were an employee of your end client).
  4. You are “involved” in one of the five ways mentioned previously, with an MSC Provider.

What happens next?
If you find that your company classifies as an MSC, you will need to apply PAYE and NICs to all payments received through your company. As an MSC, you are outside the scope of IR35 and need not apply its rules.
If you do not find that your company classifies as an MSC, you will need to consider whether the IR35 legislation applies to your engagements and make payments accordingly.
Even if you do not find yourself classified as an MSC, it is still possible to be caught by the legislation by default. Perhaps you use the accountancy services of a firm who classifies as an MSC Provider (yet you are not “involved” and therefore are not an MSC, but perhaps some of their other clients are. When making claims under the MSC legislation, HMRC will assume all clients of an MSC Provider are MSCs if some of them are and a standardised product or service is offered. It will be up to you to prove that your case is otherwise.

Debt Transfer Provisions.
Another way in which the MSC legislation differs to IR35 other than the one-size-fits-all approach, is the transfer of debt provisions. This allows HMRC to transfer the debt found under the MSC legislation to a relevant third party, in order that HMRC may still claim its owed debt regardless of whether an MSC has tangible assets or if it ceases trading.
Where HMRC deems that the debt is “irrecoverable within a reasonable time” from the MSC, the liability of the debt will be transferred jointly and severally to all persons in all of the following categories:

  1. The director, other office holder or associate (not referring to an individual such as a spouse) of the MSC.
  2. The MSC Provider or its director, other office holder or associate.
  3. Any other individual or company which directly or indirectly encouraged or been involved in the provision of the MSCs services.

If a debt is to be transferred, HMRC will issue a Transfer Notice, demanding the debt firstly from those in the first category and then in successive order if the debt cannot be retrieved from the first.

If you require further advice or require assistance with regards to the MSC legislation, please contact us, we are always happy to help. If you are an accountancy or recruitment agency and are concerned about how the MSC legislation might affect you, please contact us with any queries or with regards to our MSC Audit services at info@qdoscontractor.com.

By:Jane Hailstone

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