HMRC has published Tax Avoidance Spotlight 67, 'Managed Service Companies'. It is HMRC's second spotlight on the identification of Managed Service Companies (MSCs) and MSC Providers, including how to recognise their role in tax avoidance schemes.
What is a Managed Service Company (MSC)?
- The Managed Service Company (MSC) regime was introduced to counteract PAYE Tax avoidance schemes which were set up to deliberately avoid the IR35 legislation and 'Off-Payroll Working' rules.
- The rules target situations where a worker provides their personal services through an intermediary body such as a corporate entity or Partnership, in an arrangement facilitated and promoted by an MSC provider, that is set up to avoid the individual being subject to PAYE and National Insurance Contributions (NICs).
- When the MSC rules apply, payments received by the worker should be subject to PAYE
Key components of MSC schemes
- There are Four key conditions that must be met for a company to be an MSC. A key test is in the MSC Provider's involvement with the company and its ability to influence or control the company.
- An MSC Provider is considered ‘involved' if one of five specific tests are met and the Spotlight provides non-exhaustive examples of these tests to help determine whether an MSC provider is present.
- The Spotlight distinguishes MSC Provider's from legitimate accountancy firms.
- The provision of dedicated bookkeeping software is not within the scope of the MSC legislation. A traditional accountant will review the circumstances and present appropriate compliant options.
- A MSC Provider specifically promotes or facilitates the use of one corporate structure, often a standardised ‘off-the-shelf’ product, which is mass sold to all its customers. Common features of MSC Providers include:
- Advertisements i.e. internet ‘pop-ups’, that promise to maximise take home pay.
- Encouragement use a company and become a shareholder, taking a small salary and receiving the rest in dividends.
- Mass sold standardised 'off-the-shelf' products that are not tailored to each person.
- Regularly charging variable fees based on when the worker is providing their services.
- Software products that are programmed to suggest how the MSC should extract profits to achieve the most tax advantageous result.
- The Spotlight provides an example scenario where an individual who approached by a MSC Provider which is selling an MSC scheme. See Spotlight 67: Managed Service Companies
Editor's comment
There can be a very narrow demarcation line between the way that some professional firms operate and the Managed Service Company (MSC) anti-avoidance rules, see Accountants: Am I running a Managed Service Company (MSC).
Taxpayers should conduct due diligence before choosing an accountancy firm, remain involved in compliance, maintain records, and seek professional advice if they are unsure. The distinction between an MSC provider and a legitimate accountancy firm is not always clear-cut. With the rapid evolution of technology there is a risk that unsuspecting taxpayers may unknowingly fall within the scope of the legislation.
HMRC's earlier Spotlight 32 considers the application of the regime.
Useful guides on this topic
Managed Service Companies (MSCs)
What is a Managed Service Company (MSC)? What rules apply to MSCs? Can you avoid being an MSC provider? What is the accountancy exemption from the MSC rules? How are partnerships caught by the rules?
Personal Service Company (PSC) tax
What is a PSC? What are the tax implications for a PSC and its owners?
Partnerships
Tax planning for partnerships and LLPs
Spotlight 32: Managed Service Companies
HMRC has issued and updated Spotlight 32: Managed Service Company legislation – tax avoidance scheme involving unpaid PAYE and Class 1 National Insurance contributions. This follows their recent victories in the First Tier Tribunal (FTT) and Upper Tribunal (UT).
Tax avoidance schemes
How do you spot tax avoidance schemes? What are the types of schemes available that should be avoided? What disclosure requirements are there? When are tax clearances needed?
HMRC Tax Settlement Facilities 2024-25
HMRC provides special tax settlement facilities and opportunities to allow taxpayers to notify undeclared income or gains over a range of different taxes. Facilities are provided via special links to enable taxpayers to settle unpaid taxes.
Anti-avoidance: HMRC's spotlights
What are HMRC's Spotlights and where can you find them?
External links
