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How will it work?

How will it work? The draft legislation aims to:
  • isolate Managed Service Companies through definition,
  • remove them from the scope of the current rules applying to the use of intermediaries,
  • apply a new tax treatment.
Managed Service Companies have core characteristics which when collectively present, allow for identification and isolation. It is important to note that some of these individual features may well be present to a greater or lesser degree in other structures (such as PAYE Umbrella's, PSC's); but it is the presence of these characteristics in combination that is key to identifying/ defining the MSC schemes.
The proposed legislative definition of an MSC works in two stages:
  • To describe an MSC as a service provider to workers, which it does in the fashion of a MSC scheme.
  • To define a MSC scheme.
In short the definition of MSC schemes point toward the two principal forms mentioned above, namely Composite Companies and Managed Personal Service companies, the operation of which are virtually identical. For explanation on the mechanics of Composite Schemes, please click here, and for Managed Personal Service Companies, please click here.
Step 2 involves removing the MSC from the Intermediaries Legislation (IR35). The idea is to have two pieces of 'Services Industry Legislation' in place. IR35 will remain in place guiding Personal Service Companies as to their to employment status thereby determining their taxation position, while the proposed MSC legislation will deal with the mass managed and marketed companies.
The final step is the tax treatment of these identified MSC's. Remember that the Chancellor has as his aim to remove the "unfair competitive advantage" that MSC have gained through non-compliance.
This will be achieved by:
  • Making MSC's tax PAYE and NI on contractors at salaried levels,
  • Removing tax relief on expenses like travel and subsistence
The real cracker in all of this is that if this legislation passes as it stands, any unpaid tax liabilities from MSC's can be recovered from related third parties. This can be read to include MSC users, the MSC directors themselves, and even the agencies that are party to such schemes! This in itself will surely mean the end of Composites as we know them?
The government proposes to introduce this legislation in the Finance Bill 2007.