MSC - Legislation Overview

After the introduction of IR35, a form of company structure evolved known as a Managed Service Company (MSC). This form of corporate structure placed the worker (contractor) as shareholder of a Limited Company owned and run by the service provider. Sometimes the worker would also be appointed as Director. As shareholder they could receive minimum salary payments and the balance of income as dividends. The Managed Service Company Provider (MSCP) would perform administrative and company secretary duties and offer basic taxation advice.

This structure became popular with independent contractors and was used as a way of earning high net returns (up to 85% of gross) compared to PAYE, with little corporate responsibilities.

One of the most common forms of MSC was Composite Companies, where typically up to 20 contractors became non-director shareholders. The contractors received a low salary and expenses with the remainder payable as a dividend. This method of remuneration provided many financial benefits since it avoided the payment of National Insurance and Income Tax that would otherwise be payable if the contractor was paid entirely under PAYE (salary).

HMRC grew increasingly frustrated with the use of MSCs which, when investigated, were able to liquidate (as they had no assets) and start trading under a new company the next day.

In December 2006, the UK Treasury/HMRC introduced draft legislation "Tackling Managed Service Legislation". This sought to address the use of "composite" structures to avoid Income Tax and National Insurance in instances of trading that the Treasury deemed as being akin to "employed". After a period of consultation and re-draft, the new legislation became law in April 2007 with additional aspects coming into force in August 2007 and fully in January 2008. Following the MSC legislation, it is now the responsibility of a MSC provider to correctly operate PAYE and deduct the necessary tax and NI on all income payable to a contractor.

An umbrella company is effectively exempted from this legislation.

Managed Service Companies (MSC) differ from Limited Companies that are known as Personal Service Companies (PSC's) since it's the MSC that manages and controls the affairs of the business, not the contractor as it is with the PSC.

The 2007 Budget legislated against MSCs by removing the associated tax advantages for contractors working through them.

To reinforce this law, the government have permitted the recovery of any underpaid taxes from appropriate third parties; principally those behind the MSC as well as connected or controlling parties.

Some companies still offer variations on these schemes so it can be confusing to know what is legal and what is not.

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