Updated: Aug 5, 2022
Over the last few weeks, HMRC have taken the view that a large number of contractors are deliberately breaching Managed Service Company (MSC) legislation by failing to be compliant.
Today, we take a further look into what exactly MSC Legislation is and how this can affect contractors and extend to accountancy services.
In 2007, HMRC introduced Managed Service Company (MSC) legislation to help prevent tax abuse by contractors who provide their services via a limited company, which is controlled by a Managed Service Company provider.
This form of structure places contractors into groups of shareholders within a corporation owned and run by the service provider, providing contractors with the tax benefits of working through a limited company, without the overall responsibility.
In order to not be classed as a Managed Service Company, a limited company must demonstrate that their directors have full control of the company business and must have complete responsibility of the corporate and financial management.
If a contractor genuinely owns and manages a limited company, they will not be affected. Accountants are also not captured and can provide accountancy services to limited companies without falling foul of MSC legislation.
Due to the difficulties associated with recovering debt from individual MSC’s, the government included debt transfer provisions with the MSC legislation. The MSC typically had no assets and so they could quickly liquidate and start a new company the next day. In order to combat this, the government established the Transfer of Debt Provisions as a means to reclaim any unpaid tax.
Contractors found by HMRC to be using a managed service company are required to pay income tax and National Insurance Contributions (NICs) as if they were employees.
Third parties that have "encouraged, facilitated or otherwise actively been involved in the provision by the MSC of the worker" are also within the scope for debt recovery.
Third parties, who could reasonably be expected to know they were dealing with an MSC, will only have the debt transferred to them if the debt cannot be collected from the scheme provider or the director, office holder or associate of the MSC.
With HMRC issuing letters to a large number of contractors regarding the perceived breach and contacting numerous accountancies which may have facilitated these arrangements for the contractors they engage or have previously supported to carry out enquiries, it is important to understand what the legislation means and how it can affect contractors and accountancies alike.