MSC Legislation
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What is a Managed Service Company?
A Managed Service Company (MSC) is operated by an outside provider (MSCP) who makes you a shareholder in a company, either making you the sole shareholder, or by establishing a composite company where you and around 10 - 20 other contractors and workers are shareholders. Your MSC will supply your services to a client and pay you a minimum wage salary, on which you will be taxed and pay NI. However, an MSC will also pay you the remainder of your income through dividends, which are not subject to income tax or National Insurance.
For contractors, therefore, Managed Service Companies can offer tax advantages, helping you avoid umbrella companies and PAYE contributions, whilst also freeing you from the hassle of setting up your own private limited company.
Legislative changes
However, in the 2007 Finance Act, legislation was introduced to ensure that contractors will have to pay full PAYE and NI contributions on all contracts sourced through an MSC. A contractor operating through an MSC is now considered effectively in employment, not in business in his or her own right, and is therefore subject to full income tax and National Insurance. Each contract you undertake through an MSC will be considered a term of employment for the particular client.
In accordance with these laws, which entered into force on 6 April 2007, HM Revenue and Customs is expected to seek to recover any unpaid tax debt from MSCs and their associates. You therefore run the risk of an MSC debt being charged and recovered from you if you do not tread carefully.
Exemptions
This government legislation is not intended to target smaller independent companies so if you genuinely manage your own limited company you won’t be affected.
The legislation also does not target umbrella companies, since any work sourced through an umbrella company is considered employed income and therefore is already subject to PAYE and NI contributions.
In order to prevent MSCs slipping through the net, the government has targeted the MSCP and can impose tax liabilities on a company simply where there is an MSCP “involved” with the company.
Independent accountants are not affected – but be wary of MSCs who are now claiming to offer ‘accountancy services’ to try to avoid the changes – HMRC has issued a statement saying that such practices are likely to be caught by the current legislation.
Your Options
On the basis of the above, the MSC is effectively a defunct solution. Setting up as a limited company or as part of an umbrella company are the only corporate options. If you are contracting on a long-term basis, setting up as a company is likely to be your best option, whilst if you are working for yourself only in the short term, an umbrella company may be the solution.
For further information, see Getting Started: Limited Company or Umbrella Company.
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