MSC Overview and Advice

As from the 6th April 2007, ‘Composite Companies’ that paid dividend income to contractors were abolished.

With the new legislation that came into force on the 6th April 2007, it has become illegal to provide services via a “Composite Company”, therefore, unless you can prove to us otherwise by completing the attached form, Inspired Recruitment will be terminating all contracts that we deem to be in a “Composite Company” scheme.

Why was MSC legislation proposed?

The Treasury say that in order to receive the tax advantages of being a legal corporate form you need to be self-employed, i.e. pass the IR35 test and take on the legal responsibilities of being in business via a Limited Company.

What is an MSC?

An MSC is in the business of providing persons either directly or indirectly to other persons under a Managed Services Company Scheme.

A Managed Service Company Scheme is a “scheme” or “arrangement” under which persons supplied either directly or indirectly to other persons. The greater part of the consideration for the provision of the services of an individual is paid either directly or indirectly to that individual, and where there is a scheme provider that scheme provider, or their associates, exercise control over the general management and finances of the company or partnership.

If you work in a structure that appears in one of the following definitions then you could be caught by the proposed legislation.

• Composite Arrangements: The contractor is a Shareholder of the Limited Company along with several other contractors. The contractor is not in control of the Company, (e.g. no Directorship, no control over company bank account, etc).
• Managed Arrangements: The contractor is the Sole Shareholder of the Limited Company. The contractor is not in control of the Limited Company
• Other Arrangements: The contractor is not a Shareholder of the Limited Company, nor is a paid Employee of the Limited Company, but received the majority of the income from the contract that is being performed either directly or indirectly
• Umbrella Arrangements: The contractor is an Employee/Worker of the Limited Company

What is meant by the term ‘control’ in relation to the company?

The term is asking the question: Does the contractor control the company finances and general company management i.e. is the contractor a Company Director, and does he/she have full control over the Limited Company bank account? If not, then it is likely to be an MSC.

What do the rules mean for a contractor?

From the draft legislation as currently proposed it is our understanding that it has the following effects:

• Contractors working via a Composite Company, Managed PSC, Umbrella Structure or “Other Arrangements”
• 1) Taxed as employees under the MSC regime. No tax relief on subsistence and travel to work expenses.
• Contractors working via their own Limited company Structure (PSC)
• 2) So long as the contractor controls and is responsible for the company then they are not affected by the MSC rules, and are taxed the same as now by applying the IR35 legislation

What should I do if I’m working via a company that falls under the MSC definition?

Firstly, remember Inspired recruitment is not permitted to give any tax advice, however you should work out the possible implications of staying working via an MSC after the introduction of the new rules, and consider the possibility of switching to your own PSC.

Some basic assumptions: Rates lower than £15 per hour and contracts unlikely to last longer than three months are more likely to suit an Umbrella Company structure. Rates over £15 per hour with the likelihood of being in contract in the long-term could be better off in a PSC.

Essentially the longer you are in contract are actively earning the more likely a PSC could be your best option.

However IR35 status and the amount of expenses you are likely to incur also need to be considered.

How do I know if I should switch from my MSC to a PSC?

One option is to work out what the financial implications would be.

Some companies have developed a calculator to illustrate the effect that the proposed MSC Regulations could have on your net earnings if you worked via an Umbrella Company, Managed/Composite Company, and by your own Limited Company/PSC.

If you are considering a change to a PSC then you should also remember that whilst you operate your own PSC and under current tax legislation the travel expenses between your home base and the base of operation where your services are performed, continue to be tax deductible for up to 24 months, irrespective of the IR35 status of the contract.

Working via and running your own PSC may not be for everyone. It is important to consider the responsibilities, but there are companies out there who can provide a free limited company set up and then take care of all of the administration required to run the company legally and tax effectively, whilst the contractor retains control and responsibility for the company.

How should I switch from my current MSC to a PSC?

Careful consideration should be given by any person currently working though a Managed or Composite Structure, where the service provider is planning to convert the structure over to a sole director and shareholder of their own PSC, as this could perhaps be perceived by HMRC as the Managed Services Provider still having the “controlling” influence which could be very dangerous within this proposed framework.

The fact that the contractor is in control of their own PSC is a key point in the proposed rules and IR35.

When a contractor uses a firm to support them running a PSC it is important to ensure that there is freedom to move their PSC to an alternative support solution at any time, any type of tie in by the provider only serves as an indicator that the support provider is actually a controlling MSC.

If you are considering switching you need to instigate the change yourself and keep correspondence detailing your instructions.

Are there any possible problems?

The immediate problem for accountants supporting PSC’s, Employment Businesses, End Clients, Companies House, HMRC, etc will be the management of large amounts of administration that will be required in a very short period of time should a vast amount of contractors opt to work via a PSC.

You may wish to consider changing or setting up a PSC ready to trade after 6th April 2007.

What should I do?

• If you are currently operating and providing services via your own PSC then our understanding is that you should not be affected by these current arrangements.
• If you are currently providing services via a PSC with the support of an MSC (who controls the financial admin on your behalf), then Inspired recruitment would suggest contacting an Umbrella company or accountant to point you in the right direction.
• If you are providing services which is not a PSC and currently use the “Composite Company” scheme, you will not longer be able to legally provide your services using this scheme in future. Inspired recruitment would strongly recommend that you either set up your own PSC or use a compliant Umbrella Company (for compliant companies, please refer to the Atsco web site affiliates www.atsco.org)

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