Accountants: are you an MSC Provider?

When do the Managed Service Company rules apply to accountants? What exemption exists? What happens if you are a MSC provider?

A freeview guide

At a glance

• The MSC regime aims to counteract some PAYE tax avoidance scheming that tries to avoid IR35. 
• Very broadly it applies where a worker provides their personal services through an intermediary company (the MSC) and another party (the MSC Provider) is ‘involved’, as in has influence and some financial controls over that company. 
• Most accountants and advisers offer a ‘one-stop shop’ service to their clients including bookkeeping, accounting and tax planning. 
• Professional firms may deliver their services via cloud services and apps, and charge fees on a subscription model rather than according to actual time incurred.
• The issue is that there can be a very narrow demarkation line between the way that some professional firms operate and the Managed Service Company (MSC) anti-avoidance rules.
• Practices need to take care that  must be taken that in doing so you do not inadvertently fall foul of the MCS regime.

What's new?

• HMRC has published Spotlight 67 and Spotlight 32. These follow their litigation in the First Tier Tribunal (FTT) and Upper Tribunal (UT)
• HMRC has been following a strategy of cracking down on Personal Service Company owners who are using different strategies to avoid the Off-Payroll Working rules as is seen in their publication of Spotlight 32.
• The problem with the MSC rules is that they are broadly drafted and it is difficult for accountants to provide a standardised package that does not by its nature include some elements of control by the accountant.  

Overview

This kind of arrangement is particularly common with freelance professionals in IT as well as locums in the health and social care sector.

• Where the rules apply the income paid into the MSC is treated as employment income.
• If the PAYE and National Insurance Contributions (NICs) debts of an MSC cannot be recovered from the company HMRC can transfer the debt to other parties, including the MSC provider. 
• If you have clients who may be MSCs it is important to consider whether you, as an MSC Provider, could be on the hook for the tax liabilities.

An MSC Provider is defined as a person who “carries on the business of promoting or facilitating the use of companies to provide the services of individuals”. 

To be "Managed", a company must meed four conditions:

• The intermediary company provides the worker’s services to an end client
• The worker receives at least 50% of the money that was received by the intermediary company in exchange for the services of the worker to the end client
• The payments received by the worker are more than they would have received if all the payments were treated as employment income
• A person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals is involved with the company

Businesses that specialise in providing services to persons working through companies are most likely to be MSC Providers. However, for the MSC rules to apply the fourth rule (as above) is that they must also be ‘involved’ with their client companies. This factor largely centres around ability to control and influence.

A Managed Service Company Provider is classed as ‘involved with the company’: ‘involved’ is defined in the legislation by reference if they can:

• Benefit financially on an ongoing basis from the provision of the services of the individual
• Influence or control the provision of those services
• Influence or control the way payments to the individual (or associates of the individual) are made
• Influence or control the company’s finances or any of its activities
• Give or promote an undertaking to make good any tax loss

Particularly high-risk activities include:

• Providing a standardised package.
• Calculating the mixture of salary and dividends for clients within that package.
• Being a director or company secretary.
• Charging fees based on the number of invoices raised/payroll runs.
• Managing bank accounts.

The MSC legislation has a specific exemption where persons are MSC Providers merely by virtue of providing legal or accounting services in a professional capacity. 

This exemption will generally apply where accountants/advisors are genuinely just giving advice. 

Umbrella and other models

If you are promoting or facilitating the use of service companies through a standard package then you may well be running an MSC and the accountant exemption is unlikely to be available.

In particular, this exemption may not apply if you are:

• Specifically marketing and/or providing corporate solutions and services to individuals providing services to third parties.
• A back-office service provider who provides structures or works exclusively for clients in the service company sector.
• It is evident that you ‘influence’ or ‘control’ how payments were made to workers through the use of your standard product, by causing the workers to receive wages and dividends instead of just wages, allowing you to determine the amount to be paid as a dividend and to carry out the administrative steps to affect this. It amounts to ‘control’.

Useful guides on this topic

Managed Service Companies
What is a Managed Service Company (MSC)? What rules apply to MSC's? Can you avoid being MSC provider?

IR35: Off-Payroll Working
What is IR35? How does it work? How is the deemed payment calculated? What expenses are deductible?

Anti-avoidance: HMRC's spotlights
What are HMRC's Spotlights and where can you find them?

External links

HMRC Spotlight 32