With IR35 and the off-payroll working rules in the spotlight, we’re seeing a renewed interest in the MSC legislation anda rise of providers offering agencies assessments backed by tax loss insurance. But is tax loss insurance the answer?
What is the MSC legislation?
The Managed Service Company (MSC) legislation came into force in 2008, to prevent those falling outside of IR35 from incorrectly avoiding tax and NICs through the use of an MSC.
An MSC is a limited company that enables contractors to manage their invoicing and accounting through a composite company scheme. This involves the company being run by a managed services company provider (MSCP), with several contractors acting as non-director shareholders. The contractors are then paid a low salary and high dividends – avoiding tax and NIC while having no responsibility for running the company.
What are the consequences of MSC legislation?
The MSC legislation operates in a similar way to IR35. A contractor found to be falling within the legislation will have their payments reclassified as employment income, subject to tax and NICs. The MSC is then liable for any owed payments.
Crucially, if HMRC cannot recover the tax and NICs due from the MSC, then liability can fall to directors, the MSCP, agencies or the end client.
Assessing MSC status
An MSC operates as a business that provides a contractor’s personal services to an end-user, either directly or through an agency. Typically, contractors are paid more through the MSC than the MSC takes in fees or overheads, and that they would receive if directly employed by the MSC.
The defining characteristic of MSC status is the involvement of an MSCP. An MSCP is someone who “carries on a business of promoting or facilitating the use of companies to provide the services of individuals.”
Importantly, the MSCP must be involved with the MSC. This can be established through:
- Ongoing financial benefit from the provision of the worker’s services;
- Control or influence over the provision of the services of the worker;
- Control or influence over how the worker is paid;
- Control or influence over the company’s finances or activities; or
- Providing or undertaking to make good any tax loss.
MSC tax loss insurance
As mentioned, there has been an increase in MSCPs offering assessments covered by tax loss insurance – one of the key indicators of a provider being involved with a MSC.
This significantly increases the risk of challenge by HMRC and could, inadvertently, turn a personal services company that doesn’t fall within IR35 into an MSC and liable for tax and NICs.
Our advice is to tread with caution and always seek independent legal advice when unsure.
If you’d like to know more, get in touch with one of our specialists today.