No, if you are working through an Umbrella or other structure such as My PAYEsafe where all your income is taxed under PAYE.  Maybe, if you are providing your services through a Personal Service Company (PSC) and you receive part of your income as a dividend.

As a quick check, if you can answer “yes” to all of the following questions, then you are likely to be working through a PSC and therefore unaffected by the new legislation:

• Are you the director of your company?
• Do you have a company bank account of which you are a signatory?
• Do you control the way in which amounts are drawn from your company bank account and do you determine the amounts and the timing of any drawings?
• Can you confirm that your service provider or accountant does not influence or control how your company operates?

If the answer to any of the above questions is “no” your company may be an MSC.

July Update on the MSC Legislation and How it Affects Agencies and Contractors

Introduction

After 6 months of uncertainty on what the ‘Managed Service Company’ (MSC) legislation actually means the most important opinion—that of HMRC who will be enforcing the legislation—is now available on the HMRC website: http://www.hmrc.gov.uk/employment-status/msc-guidance-july07.pdf

Whilst inevitably HMRC take a very strict interpretation, (which as we have seen with IR35 may or may not be followed by the courts) contractors, service providers and agencies are well advised to follow their guidance if they do not want a ‘knock on the door’ in the future.

HMRC’s Mindset

The principle which underpins all of HMRC’s guidance is whether, and the degree to which, a service provider or accountant controls or influences a contractor company’s business. Broadly speaking if a contractor has made the decision to run his business through a limited company following tailored advice from an accountant or service provider, HMRC are not likely to regard his company as an MSC. The contractor will be free to outsource some of the administrative functions to a service provider, provided they are not effectively handing over control.

If a contractor is simply placed into a corporate structure without really understanding what is happening (other than they will save tax) HMRC will see this as a “scheme” and will seek to tax any dividends as employment income.

This goes back to HM Treasury’s view that a person “genuinely in business on their own account” should understand and make decisions as to what is happening with the financial and management affairs of their own business.

HMRC’s view of what is an MSC provider

The legislation says that an MSC provider is someone who “carries on a business of promoting or facilitating the use of companies to provide the services of individuals”. HMRC’s view is that accountants or service providers who specialise in providing services to the contractor market will be MSC providers because they facilitate the use of companies by contractors.  HMRC state, however, that just because an accountant or service provider is an MSC provider, it does not follow that their clients are MSCs.  The MSC or PSC status of a contractor’s company depends on the services provided by the accountant or service provider.

The question HMRC ask is:

Is the MSC Provider involved with the contractor’s business?

What services do HMRC believe a service provider or an accountant can provide?

The answer is only those services that do not constitute being ‘involved’; HMRC has provided examples of what they consider to be involved and not involved with the business.

HMRC believe the following services would generally not constitute being involved and are regarded as appropriate:

• Managing company formation, set up and acting as the registered office
• Registering companies for VAT, CT and PAYE, and preparing their returns
• Giving advice on IR35 status - provided it is genuine advice and impartial
• Advising on a remuneration package – it is acceptable to advise on the balance between salary and dividends a contractor should take, provided it is tailored advice to the contractor’s requirements and individual circumstances are considered
• Advice on expense claims – this is provided that the expenses are individually considered and not just processed as a standardised product
• Preparation and submission of invoices – provided that they are prepared and submitted at the request of the contractor
• Operating of payroll, preparing monthly payslips and producing employer’s payroll returns
• Preparing management accounts, financial statements and secretarial support
• Providing group insurances

HMRC have caveatted each service by saying that they will have to look at the specific circumstances surrounding the provision of the service.  Broadly speaking, the more individual and tailored a service the more favourably HMRC will look at it.  The more packaged a product, the less favourably HMRC will look at it. For agencies and contractors this means it is better to seek advice from a service provider who offers a more bespoke service.

HMRC believe the following services would constitute being involved in all circumstances and are not appropriate:

• Providing a standardised corporate solution package
• Being a director or company secretary of a contractor company
• Managing the company bank account or the company’s finances through a separate account
• Charging fees that are linked to a contractor or his company’s earnings

Conclusion

The recently published HMRC guidelines are very helpful for those operating small (single employee) businesses in that they make clear which services HMRC believe are appropriate for a PSC to outsource to a service provider or accountant.  Put simply, contractors or agencies should ask service providers and accountants into which category do they believe each of their services falls in.

Julian Ball
Legal Director