Most contractors are aware of the intermediaries legislation, more commonly referred to as IR35, if you are not, then you should be having strong words with your accountant to ask why you have not been informed!
However not many contractors are aware of ITEPA 2003 s61A through to s61J, more commonly known as the Managed Service Company [MSC] Legislation.
A recent tax tribunal case has highlighted the importance of understanding this piece of legislation and the dire consequences of being caught, therefore converting all dividend income into taxable remuneration regardless of the IR35 contract status.
What is it?
MSC legislation was introduced in 2007 in response to the rise of composite companies and umbrella companies used to circumvent IR35. In essence, the composite provider set up a company and appointed a director. The contractors in the company held different classes of share, which enabled the provider to pay selective dividends equal to the money each contractor brought into the composite, thereby avoiding NIC and PAYE.
The introduction of this legislation promptly closed the doors of many Umbrella or MSC providers operating in this way, however the legislation made it clear that it was also intended to apply to single-contractor companies run by outside providers.
MSC enforces the application of PAYE and Class 1 national insurance on all payments made and also includes a look through provision which enables HMRC to pursue the participators personally for any liabilities due.
Assessing your MSC Status
Several factors can turn a personal service company into an MSC, but there are three that matter, and they all concern the behaviour of the Accountant, the legislation provides this definition of an MSC provider as:
A person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals
A conventional Chartered Accountant practice would be unlikely to cross this bar even if much of its business came from personal service companies.
However certain online Accountancy providers, who typically never even meet the clients in person and those who use a software based solution aimed primarily at the Contractor sector would certainly be in more danger.
If your accountant is deemed an MSC provider then there is two more issues to consider.
Accountant Influences Payments
This considers whether your accountant influences or controls the way in which payments to the individual are made. This would include how the salary levels were established and how and when dividends are declared and paid.
If you simply receive a payslip detailing how much salary and dividend you are paid, this could be a risk.
There is also an issue if your accountants fee is based on your turnover. If there is no fee when there is no turnover, this is a clear indication of influence over payments and would be indicative of an MSC provider.
Accountant Influences Finances
An MSC provider is involved with a company if it influences or controls the company’s finances or any of its activities. This centres on the service companies banking arrangements.
If your accountant has access to your bank account and can access funds or transfers funds to enable a benefit of interest for themselves, this would be a clear indicator of an MSC provider.
The tribunal also found that if the accountant utilised a method of retaining the companies money pending payment of their taxes, this constituted control of their finances.
If you operate a contracting company and yourAccountancy Provider is deemed to be an MSC Provider, then your company could also be deemed an MSC resulting in the requirement to operate PAYE and NIC on all payments made to shareholders, regardless of IR35 status.
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