Managed Service Companies Print
A managed service company (“MSC”) is an intermediary company through which individual workers provide their services to the end-user. For a company to be an MSC it must fulfil the following four conditions:
- The company’s business must consist wholly or mainly of providing (directly or indirectly) the services of an individual to third party clients.
- The payments made (directly or indirectly) to the individual (worker) or associates of the individual of an amount equal to the greater part or all of the sums received by the service company for the services provided by the worker. This will be compared on a cumulative basis rather than in respect of any particular period.
- 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 on which PAYE has been applied. This comparison is made each time a payment is made to the worker, and not on an annual basis.
- There must be a person termed an “MSC Provider”, and that person must be involved with the company.
HMRC consider that if the answer to both of the following questions is yes, a person is an MSC provider:
Does the person promote or facilitate the use of a company?
Does the company provide the services of an individual?
This follows HMRC’s success in the courts in arguing that the MSC legislation applied to arrangements established and run by a third party – Costelloe Business Services Ltd. The case was won by HMRC at each stage up to the Court of Appeal, and the Supreme Court has refused permission for the taxpayer to appeal further, so the decision is final.
An MSC Provider is a person carrying on a business of promoting or facilitating the use of companies to provide the services of individuals.
HM Revenue & Customs have issued a guidance booklet on MSCs. In the booklet it is stated that the following are an MSC Provider:
A Service Provider carrying on a business specifically of marketing and/ or providing corporate solutions and services to individuals providing their services to end clients.
A firm of accountants carrying on a discernible part of their business specifically to market and/or provide corporate solutions and services to individuals providing their services to end clients. This applies to the discernible part of the business only.
A business which terms itself a Tax Adviser, Service Provider or whatever but which specifically markets and/or markets corporate solutions and services to individuals providing their services to end clients.
HMRC also state that the following are not an MSC Provider by virtue of the activities described below:
A firm of accountants carrying on a business of being accountants (irrespective of the percentage of the client base which is individuals operating through service companies)
A tax advisor carrying on the business of being a tax advisor generally
A company formation agent
A Chartered Secretary
An employment business/agency undertaking its core business of placing work seekers (including those operating through companies) with end clients
Service providers providing services to companies generally, for example insurance companies, payroll bureaux etc
A trade association operating in the service sector.
Payments made by the MSC to the worker are treated as deemed employment payments on which income tax, and Class 1 NIC should be deducted under PAYE. In addition the MSC is liable to pay the secondary (employer’s) Class 1 NIC.
The deemed payment is broadly computed after deduction for any expenses incurred by the worker which would normally fall to be allowed under the normal employment tax rules, but after allowance for the employer’s NIC which has to be accounted for out of the deemed payment.
Collection of the PAYE tax from MSCs has often been a problem for HMRC as they may be set up offshore, have no assets, and can easily be wound-up, and the workers transferred to a new MSC. To counter this any outstanding PAYE tax can be collected from:
- A director or other office holder, or an associate of the MSC;
- An MSC provider who is involved with the MSC;
- A person who (directly or indirectly) has encouraged, facilitated or otherwise been actively involved in the provision by the MSC of the individual’s services; and
- A director or other office holder, or an associate of a person who is not an individual but is within b. or c. above.