Managed Service Company & HMRC Investigations
A Managed Service Company (MSC) employs a specific company structure to deliver administrative services to other businesses. These services include the calculation of PAYE, profits and dividends, as well as dealing with both Companies House and HMRC.
Liability to HMRC for PAYE and National Insurance Contributions arising from earned income, predominantly arises in three ways. The majority of individuals are generally classified as either ‘self-employed,’ with the result that they are responsible for declaring and accounting for their own tax liabilities, or ‘employed,’ with the responsibility of calculating, retaining and accounting to HMRC for the accrued tax liability becoming the responsibility of the employer.
However, there exists a third category of workers being those who, ostensibly, are employed individuals, but seek to establish themselves as self-employed workers either voluntarily or because their contracts of employment require them to do.
They seek to establish this tax status simply with the view to mitigating their tax liability or completely avoiding it by providing their services through an intermediary company or partnership.
Receiving payment of income through a limited company provides tax benefits which are not available to those taxed as individuals in the normal manner. Income Tax and National Insurance Contributions paid by companies and shareholders are normally lower than those paid by employees and their employer.
Schemes seeking to provide such a tax avoidance facility are provided by a Management Service Company, operated by Managed Service Company Provider.
A plethora of artificial schemes has appeared with the sole intent of assisting workers manipulate their tax liability to the detriment of HMRC, thereby abusing the tax system, whilst earning fees for the providers of such schemes.
To combat this situation, the Government introduced the Income Tax (Earnings and Pensions) Act 2003.
Tim Thompson of KANGS outlines the position generally.
The Nature of a Managed Service Company and a Managed Service Company Provider
What is a Managed Service Company (MSC)?
A MSC provides the services of an individual, or individuals, to its clients and may be structured as a:
- personal service company,
- partnership,
- a composite company for multiple worker-shareholders.
The promised tax saving may be achieved by, for example, appointing the individual taxpayer as a shareholder of the MSC which company will then contract that person’s services to the end client. Such services will be paid for by the end client to the MSC.
Typically, the MSC will then pay the individual a lower salary, for declaration for tax purposes, but that individual will then receive the balance earnings by way of alternative means, such as dividends, thereby avoiding the true tax position.
The individual, despite being an owner of the MSC, to the extent of being a director, shareholder or partner, has no control which remains in the hands of a MSCP working alongside the MSC.
This form of structuring has led to considerable abuse of the tax system and HMRC being deprived of revenue to which it is entitled.
What is a Managed Service Company Provider (MSCP)?
To fall within the statutory definition of a MSC, it must be involved with a MSCP.
The MSCP provides to the MSC accounting services such as calculating PAYE, profits and dividends and administrative assistance, such as handling affairs involving Companies House and HMRC.
This assistance relieves the MSC from such obligations in exchange for the fee charged by the MSCP.
However, the fundamental role of a MSCP is to promote or facilitate the use of MSCs by attracting customers through, amongst other promises, the prospect of an increase in the level of take-home resulting from the reduction in liability to Income Tax or NIC.
The Relevant Law
The Income Tax (Earnings and Pensions) Act 2003 (‘the Act’) provides:
S.61B Meaning of ‘managed service company.’
A company is a ‘managed service company,’ MSC, if:
- its business consists wholly or mainly of providing, directly or indirectly, the services of an individual to other persons,
- payments are made, directly or indirectly, to the individual, or associates, of an amount equal to the greater part or all of the consideration for the provision of the services,
- the way in which those payments are made would result in the individual, or associates, receiving payments of an amount net of tax and national insurance exceeding that which would be received by that individual if every payment in respect of the services were employment income of the individual and
- a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals i.e. a MSC Provider, MSCP, is involved with the company.
A MSCP is ‘involved with the company’ where it, or an associate:
- benefits financially on an ongoing basis from the provision of the services of the individual,
- influences or controls the provision of those services, e. g. by determining the nature of the contract,
- influences or controls the way in which payments to the individual, or associates, are made,
- influences or controls the company's finances or any of its activities, e.g. by nominating banking providers, or
- gives or promotes an undertaking to make good any tax loss.
When dealing with the manner in which the worker is to be taxed, the Act provides as follows.
61D Worker treated as receiving earnings from employment
This section is effective when:
- the services of the individual worker are provided, directly or indirectly, by a MSC,
- that individual, or an associate, receives a payment or benefit which can reasonably be taken to be in respect of the services, and
- the payment or benefit is not earnings, as defined by the Act, received by the worker directly from the MSC.
The MSC is treated as making to the worker, and the worker is treated as receiving, a payment which is to be treated as earnings from an employment.
The practical effects of the Act are that:
- it affects all workers who provide their services through an MSC,
- such payments are deemed employment income,
- PAYE and NIC are to be paid in respect of such income,
- the liability arises whatever the nature of the payment and whether it is received directly or indirectly,
The Act is designed to tackle arrangements that artificially lower a person’s liability to Income Tax and NIC.
How We Can Assist
The Act seeks to tackle those arrangements that artificially lower an individual worker’s liability to Income Tax and NIC and targets the marketing or facilitation of specific corporate arrangements by Managed Service Company Provider businesses.
HMRC has published Spotlight Notices highlighting such schemes as involving aggressive tax avoidance.
Taxpayers should be continually cautious when considering utilising such company structures and be wary of the increasing activity by HMRC to investigate and prosecute those adopting them.
The team at KANGS offers enormous experience gained from representing clients engaged in HMRC investigations of every description. If we can be of any assistance, we would be delighted to hear from you.
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through live conferencing or telephone.
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