26 July 2007

In December 2006, the government set out its strategy for tackling avoidance of tax and National Insurance through, what it saw as, the widespread misuse of managed service companies. The 2007 Budget introduced legislative measures which provided a new tax regime for what are now referred to as ‘Managed Service Companies’ (MSC). Since 6 April 2007, all payments received by a worker providing services through a MSC are subject to Pay-As-You-Earn (National Insurance applies from 6 August 2007 onwards) as though the worker were an employee of the end user.

In brief, the MSC legislation includes four tests to determine whether a company is a MSC. The key test is a) whether the company is receiving services from a Managed Service Company provider (MSCP) and b) if so, whether the MSCP is ‘involved’ with that company. Both these tests must be met. Therefore, even where a provider is classed as a MSCP, it only has an impact where that same provider has “involvement” with the individual company.

HMRC issued guidance on 10 July 2007 aimed at helping individuals, recruitment agencies and providers to understand how HMRC will interpret the new legislation. In particular, the guidance covered what, in HMRC’s view, constitutes an MSCP, and it set out what “involvement” – defined with reference to ‘influence’ and ‘control’ - really means. This guidance is extremely helpful and confirms that if a contractor is a director of their own limited company and takes on full decision making responsibility, their company can receive personal and tailored advice, and accountancy and certain other support services, without the company being treated as being an MSC under the new legislation.

Brookson has sought extensive professional advice over the past few months, and following issuance of the HMRC official guidance, to ensure that the accountancy services it provides are compliant with the legislation and are not considered to be “involved” with contractors’ companies for these purposes.

Martin Hesketh, managing director of Brookson adds: “The guidance document that HMRC has produced is great news for our members and has added a lot of clarity. It confirms our initial view of the legislation that there remains a market for service providers to deliver accountancy and support services to contractors who are genuinely in business on their own account. It is fair to say that there was a good degree of confusion in the contracting industry following the budget announcement in April and this kind of clarification from HMRC is very welcome.

“Since the new legislation was announced, we have fundamentally changed the way we work and the services we provide to contractors to ensure that we can continue to provide compliant services to support them in their chosen way of working.

“As has always been the case, each individual must continue to make an informed choice as to the most appropriate way of providing their services in a compliant manner - whether as an employee of the end client or an agency, an employee of an umbrella company, a sole trader, or as a director running his or her own personal service company.

“An individual who is truly in business on their own account, who is willing to take on the responsibility of running their own company, and fully understands the obligations of being a company director, can continue to enjoy the flexibility and legal protection offered by providing services through a personal service company. That said, it is important that such individuals fully understand the significance of the new legislation, both in terms of the need for compliance and the personal risks involved for non-compliance, with HMRC having the power in certain circumstances to transfer MSC debts to its directors and certain third parties where the MSC has not paid the correct amount of tax. Our advice to all contractors continues to be to ensure you take advice from a reputable advisor with a strong compliance track record.”

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