Managment Services Company (MSC) Scheme Providers

If you have been told by your MSC Scheme Provider that you will simply be able to move across into a PSC, thereby side stepping the new legislation and carrying on as normal - you will have been badly advised.

If you are contractor or Temporary worker and are using a:
  • Composite company, or
  • Managed Personal Service Company, or
  • simply finding yourself being pushed into a PSC,
you would do well to read the following information. It will only take 5 minutes.

Subjects covered: Questions and Answers - the facts in a nut shell
Definition of an MSC
History
How will it work?
Questions and Answers
- the facts in a nut shell
 For the last 3 months, I have been told that I now need to run to my own company (PSC). Why is this?

On the 6th of December, the government put forward proposed legislation which aimed to tackle the wide scale non-compliance by MSC Scheme Providers in the contacting industry.

To circumvent this legislation, the MSC Scheme Providers believed that by simply moving their contractors into PSC's they would achieve this.

Indeed, until very recently the industry was witness to a wide-scale migration of contractors from Composite Companies into PSC's. Company formations over the last 2 months have reached record levels.

I get the feeling that all is not well. What's happened?

Had there been no difference between the Proposed Legislation and the Draft Legislation, the MSC Scheme Providers would have been right.

The truth is they have got it horribly wrong. There are massive differences between the Proposed and the Draft Legislation, and the implications to those blindly doing as they told (that is setting up their PSC) are enormous.

What has changed since the Budget Speech?

For the MSC Scheme Providers and those that use them - a lot.

In what can only been described as some of the most aggressive legislation in recent years, the government has made it very clear, that they have every intention to wipe out any form of non-compliance in the temporary worker market.

Tax motivated incorporation in eyes of HMRC equates to non-compliance.

But the MSC Scheme Providers have got away with it before?

Yes, but this time the legislation does not tackle the Products (Composite Companies) that MSC Scheme Providers create, but rather the MSC Scheme Provider themselves.

Let's just say - the government is calling it a day.

Who is the MSC legislation really aimed at?

In short the MSC Scheme Providers themselves, regardless of whether they provide:
  • Composite Companies
  • Managed Personal Service Companies
  • Personal Service Companies
Aaah, but what about Umbrella's?

We can categorically state that PAYE Umbrella's (Employment Management Companies) are not the Target. Refer to the definition below, and we feel you will agree with us.

How can Atlantic Umbrella be so sure?

The principal shift in emphasis between the Proposed and the Draft legislation, can be found in the definition.

In short, the definition is both significantly tighter than what it was, and it also re-directs its focus onto the MSC Scheme Provider themselves.

The definition also has some important exclusions, which make it very clear that HMRC want compliant operatives to continue providing services to the contracting industry. Refer to the definition.

Aaah, but everyone says that their "system" is outside the legislation?

Okay but have you noticed how, what you are reading right now is open to the general public? To date we have not seen a single publicly announced statement from an MSC Scheme provider, advocating what they are doing…

Secondly, why are all the MSC Providers now frantically running toward setting up PAYE Umbrella's?

But that means I am okay again, right?

Are you sure? Principally there are 2 issues you need to consider:

Firstly, history shows that HMRC always make an example of legislation offenders. It is HMRC's modus operandi.

It is safe to assume that a few MSC Scheme Provider(s) will come under a direct HMRC legal attack within the short term. With that in mind, do you want an HMRC Tax Inspector pouring over your figures? You will do if your MSC provider is the one chosen by HMRC.

Secondly, with no experience in running a proper pay rolling service, can you be sure that you will even get the service or expertise that are required? Do they possess an HMRC expenses Dispensation?

Ok, but who says Atlantic Umbrella won't be visited?

Fair question -let's consider the facts:
  • Atlantic Umbrella has been operating in a compliant fashion for the last 5 years. We are an Employment Management Company, not an MSC Scheme Provider.
  • We have never been an MSC Scheme Provider ever. We have never ever paid dividends or used any other tax avoidance/ evasion mechanisms in our trading history. HMRC know this.
  • In recognition of our meticulous approach to Contractor management and strong internal controls, we were issued an Expenses Dispensation by HMRC in 2005.
  • We currently still hold our Expenses Dispensation. And here is a bit of insider info- none have been issued in the last year. So if you come across some 'up-start' claiming to have one, check it out. Chances are you are being deceived.
We are making two points here. Firstly, by virtue of our history of compliance we are not under the spot light, secondly even if we were; we have nothing to worry about. And if you are with us, neither will you.

That is more than any MSC can offer you.

I want to see the MSC definition for myself?

Refer below to the section "MSC definition and explanation". We have it line for line, just click here.
Definition of an MSC A MSC is a company that does ALL of the following

  Criteria Introduced Comments
Draft Proposed
1. Provides services of individuals to other persons   Here  
2. Makes payments to those individuals   Here  
3. Makes payments exceeding what the individual would have received if it had been employment income Here   Takes PAYE umbrellas out of scope
4. Is a person who promotes and facilitates the provision of services and is involved in the running of the company Here   this is intended to single out the scheme provider as distinct from other companies providing services


Involvement" in the sense of (4) entails ONE of the following:

  • the provider benefits financially on an ongoing basis from the provision of services
  • the provider influences or controls the provision of services
  • the provider influences or controls the payments to individuals
  • the provider influences or controls the company's finances or activities
  • the provider gives an undertaking to make good any tax loss.
History
 IR35 was introduced years back with the aim of removing the tax advantages enjoyed by workers who disguised their employment (with the end client, the recipient of their services) with incorporation (by forming their own Limited Company through which to trade), thereby enjoying the fruits of reduced PAYE and NI liabilities.

IR35, was from HMRC's perspective an almost non-starter and to date there exists industry-wide non-compliance as various schemes were devised to outsmart the Government's initial attempt at reigning the industry in. The most prolific of these are, as you guessed it the Composites and Managed Personal Service Companies schemes.

In fact, these schemes have proven so popular that over the last 5 years they have grown at exponential rates, and today are seen as a risk to the Exchequer, with losses in tax revenue for the Government estimated at around £350 million.
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.