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

  • Many accountants and advisors offer a ‘one-stop shop’ service to their clients.  
  • Care must be taken that in doing so you do not inadvertently fall foul of the Managed Service Company anti-avoidance rules.
  • The Managed Service Company (MSC) regime was brought in to counteract tax avoidance schemes that had been set up 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’ with that company. 

What's new?

  • In April 2022 there have been reports in the media indicating that HMRC has chosen to raise assessments on the clients of several accountancy firms who operate so-called serviced 'Umbrella' company pay models. This follows the Court of Appeal's decision in the Christianuyi Limited & Others v HMRC [2019] WECA Civ 474.
  • 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”. 

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 they must also be ‘involved’ with their client companies.

‘Involved’ is defined in the legislation by reference to any one of five activities that focus on:

  • How the MSC provider is remunerated.
  • The influence or control they have over the MSC and worker.
  • Whether there is 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


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