Further to announcements made in the 2006 Pre-Budget Report, the Government has published details of plans to tackle perceived tax and NIC avoidance by managed service companies (MSCs).
Draft legislation has been issued for consultation, along with the consultation document itself entitled Tackling Managed Service Companies. According to the guidance, personal service companies (i.e. those concerned with the existing "IR35" rules) will not be within the scope of these measures - the intermediaries legislation remains in place for the present.
In his 2006 Budget speech, the Chancellor indicated that changes were afoot in this area. The Government believed that the number of individuals working through MSCs was growing rapidly and a tightening of the rules therefore became necessary. There are around 150 MSC scheme providers currently operating in the UK with about ten large ones providing the vast majority of workers in MSCs. There is a degree of uncertainty attached to estimates in this area but HMRC analysis suggests that the number of workers in MSCs has grown from around 65,000 in 2002-03 to at least 240,000 in 2005-06.
Broadly, MSCs are multi-person, personal service companies, often referred to as "managed personal service companies" or "composites".
In a composite company scheme several (typically ten to twenty) otherwise unrelated workers are made worker-shareholders of the company. The size of the company is restricted to ensure that profits do not exceed the threshold for the small companies’ rate of corporation tax. Each worker usually holds a different class of share in the company. This enables the company to pay different rates of dividend to each worker, and in practice the dividend received will be directly related to the company’s income from the end client for work undertaken by that worker.
In a managed personal service company (MPSC) scheme, in contrast to a composite company, there is only one worker per company structure. The MSC scheme provider performs similar functions for MPSCs as for composite companies – it usually provides a director and exercises financial and management control of the company, typically performing this function for many MPSCs.
Broadly, the consultation document sets out proposed changes that would mean that HMRC no longer have to rely on the IR35 legislation to require the operation of PAYE and payment of NICs by the MSC. New provisions will also restrict tax relief for travel expenses paid to MSC workers.
In addition, the proposals also provide wider powers for HMRC to transfer PAYE and NIC liabilities to a number of "appropriate” third parties. It is proposed that these will be the directors, shadow directors, connected or controlling parties of the MSC or MSC scheme provider. These extended powers are designed to make it easier for HMRC to enforce and collect PAYE and NIC debts. They will also make it less resource-intensive to monitor and police compliance as there will be no requirement to consider the specific nature of relationships between the end user and the worker for each engagement.
Practically, however, the proposals may not improve HMRC’s ability to enforce the collection of debts from MSCs, MSC providers and/or their directors who are resident outside the UK.
Subject to the consultation process, it is envisaged that the proposals will be included in Finance Bill 2007 and take effect from 6 April 2007.
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