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The Revenue issues Managed Service Company guidance
In the December 2006 pre-Budget report Gordon Brown started a public consultation entitled "Tackling Managed Service Companies" aimed at ensuring everyone paid their "fair share" of national insurance contributions. Revised legislation followed the consultation in the March 2007 Budget. This legislation has now been debated in the House of Commons and passed up to the House of Lords. This means it is "substantively enacted". As part of the Commons debates HMRC promised guidance on MSCs and this has now been released.
The legislation is complex and the guidance runs to some 48 pages. The guidance is "intended to clarify aspects where there is perceived ambiguity and to make HMRC’s intent clear". For these reasons alone it is a worthwhile read:
http://www.hmrc.gov.uk/employment-status/msc-guidance.htm
As ever HMRC guidance does not have force of law and the primary legislation being inserted into Chapter 9, Part 2 ITEPA 2003 remains the ultimate destination for those seeking to understand the revised legal position.
So what does it all mean? The legislation introduces the concepts of a "managed service company" (MSC) and "MSC provider". There are detailed definitions of both of these terms in the legislation, but some basic understanding of both will be required by those potentially affected. The basic intention is to apply full PAYE to workers utilising such structures and remove the advantages obtained via such solutions.
In order to provide teeth to the new legislation, a parallel "transfer of PAYE and NICs debt" rule has been introduced in new s688A, Part 11, ITEPA 2003. Where the MSC has not applied full PAYE then a PAYE debt can be transferred to a third party who has "encouraged or otherwise facilitated" the use of the MSC.
MSC and MSC provider
Key to the legislation is the existence of an MSC provider "involved with" a client company. An MSC provider is defined as "a person who carries on a business of promoting or facilitating the use of companies to provide services of individuals".
"Involved with" is defined by reference to any one of five activities.
For the MSC legislation to apply the service provider must both fulfil the definition of an MSC provider AND be involved with their client companies.
Umbrellas
Specific confirmation is provided on page 9 of the guidance that the MSC legislation does not apply to Umbrellas. This is because the salary and allowable expenses paid to the worker are the same as they would have received from any other company and thus the third condition of being an MSC is not met. This is that "the payments received by the worker are greater than if all the payments were treated as employment income of the worker".
MSC providers
The fourth condition to a company being an MSC is that there must be an MSC provider "involved with" the company. To be an MSC provider a person must be carrying on a business of promoting or facilitating the use of companies to provide the services of individuals.
Promotion means marketing, encouraging, initiating etc. and takes its natural meaning.
Facilitating means helping, making easier, enabling.
Exemptions from being an MSC provider
The legislation contains exemptions from the MSC provider definition for two key types of business. These are accountancy or legal services provided in a professional capacity. Also excluded are employment businesses and agencies.
These exemptions require qualification. Neither the accountancy practice, nor the employment agency can carry on a business (or part of a business) of providing structures through which workers provide their services to end clients, where either the accountancy firm or employment agency was involved with the MSC company.
Involved With
This area will become a key focus. Examples are given in the guidance that would constitute being "involved with". They are:
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Providing a standardised corporate package solution;
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Being a director of client companies;
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Being the company secretary;
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Managing the company bank account or the company’s finances through a separate account;
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Charging fees based on the number of invoices raised/payroll runs.
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What does this all mean?
Without any doubt this new legislation poses huge question marks to the service providers who prior to 5th April 2007 serviced temporary contractors with a "managed solution". The guidance from HMRC, whilst outlining their ideas, at best introduces a huge question mark over the method of operation of many suppliers still in the market. In the opinion of Freelance Professional Services Limited the only safe way forward is via the Umbrella structure that HMRC acknowledge in the guidance is unaffected.
FPS Umbrella is the perfect solution for the temporary worker or recruitment agency concerned about the new legislation. Not only is the Umbrella structure itself cleared by HMRC, but Freelance Professional Services Limited have been operating an expenses policy cleared by HMRC for over two years. The combination in FPS Umbrella is clearly a compliant solution in a market place full of confusion. HMRC themselves must be delighted with the chaos and the abandonment of so many structures. The market must now realign itself to the revised legislative position. By using FPS Umbrella you can rest assured this is being compliantly addressed.
Other useful links
http://www.hmrc.gov.uk/employment-status/details.htm
http://www.hmrc.gov.uk/employment-status/legislation.htm
http://www.hmrc.gov.uk/budget2007/bn46.htm
Author: Mark Bale, Group Taxation Manager, Charterhouse Group International
For further information please contact your Account Manager or our Agency Support Team on 08707 669 559
Charterhouse Group International Plc
2nd Floor, 37 Lombard Street, London, EC3V 9BQ
Tel: 08707 669 559 Fax: 01624 818502
Email: customer.services@charterhousefps.co.uk
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