Managed service companies

A new tax regime for managed service companies ("MSC") has been in effect from 6 April 2007, although certain aspects have been delayed until January 2008. The legislation enacting the new regime is still passing through the various stages in Parliament, but when it eventually reaches its final form, the new law will have retrospective effect.

The upshot is that there are now two tax regimes which can be applied to the provision of labour services via intermediaries. Firstly, we have the IR35 regime, a familiar concept for a number of years now (particularly popular amongst IT professionals who commonly establish a limited company which then provides IT services by way of that individual); secondly the MSC. The intention is that the new regime is to be a harsher, more of a blanket tax regime applying to MSCs.

So what is an MSC?

An MSC is a company whose business consists in the main of the provision of the services of an individual to other persons. This sounds like IR35, but the principal difference between an IR35 intermediary and an MSC is the existence of an MSC provider, which carries on a business of promoting or facilitating the use of companies to provide the services of individuals and is involved in the business of the intermediary.

HM Revenue & Customs have found MSCs to be an increasing problem as a result of the large number of workers involved and the resource-intensive nature of applying the IR35 test. In addition, even when HMRC has established that there are PAYE and National Insurance Contributions ("NIC") debts, it has not been able to secure payment from MSCs, because they either have no assets and can generally be wound up or they simply cease to trade and the workers move on to a new MSC.

The new tax regime means that workers provided via an MSC will have to pay tax and NICs at the same level as other employees. They will not be able to argue successfully that they are self-employed.

Alan Lewis, our partner who heads our employment team says, "The most controversial aspect of the MSC regime is likely to be that if the MSC fails to deduct adequate PAYE and NICs, HMRC now has the ability to recover the shortfall from the MSC or, if that fails, from third parties, including a director of the MSC, or a person who has been actively involved in the provision by the MSC of the services of the individual."