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We’ve explained IR35 to you and it wasn’t too bad, was it? Now we have the intricacies of MSC legislation made easy for you to digest.
So, what is and MSC or ‘Managed Service Company’? Well, following a protracted period of consultation the Managed Service Companies (MSC) legislation came into force in the 2007 Budget. MSC was designed to further enhance and strengthen the existing IR35 legislation.
It is a long-standing principle that the manner in which income is taxed is determined by its nature. In other words, income generated from true employment should be taxed as such. Consistent with this principle, the Government seeks to ensure that even if an individual is working through a company or a scheme provider, if the underlying nature of the contract is one of employment, Tax and National Insurance contributions (NICs) should be paid at employed (PAYE) levels.
According to HMRC, in contrast to Personal Service Companies (PSCs), workers using MSCs are invariably not in business on their own account. HMRC take the view that the underlying nature of the contracts in which they are involved is actually one of employment and should therefore be taxed as such, under the PAYE scheme.
The MSC legislation was introduced to put an end to the blatant abuse of IR35 through the use of companies, which HMRC did not have the resources to police. By transferring the assessment from individuals to the service company, HMRC hoped to regain control of the situation and make challenges easier to identify/raise.
There is existing legislation (IR35) currently in operation to ensure that the correct tax and NICs treatment is applied to a worker’s income, depending on their “Employment Status”. However, in the vast majority of cases legislation is not being followed by Managed Service Companies, which are therefore not applying employed levels of Tax and NICs.
The MSC legislation prevents Managed Service Companies, including Composite Companies, PSCs and Scheme Providers, from allowing individuals to gain an unfair or competitive advantage over compliant workers and businesses.
In addition to contractors having to fully understand what their “Employment Status” is on each contract they undertake, they must now also understand the structure of the service company they operate though.
In a nutshell, when you are considered as “Inside IR35” or “Deemed Employed” and are investigated by HMRC, if you are found to be using anything other than a PAYE based payment solution; you and your scheme provider are liable to be billed for any underpaid Tax and NICs.
It is the MSC legislation that gives HMRC this power. Under the Transfer of Debt legislation, HMRC is authorised to transfer the debt to anyone within the scope of the legislation for recovery, should the service company not repay any additional tax charges.
Remember: Crystal Umbrella uses PAYE tax methodologies to process all income, so this piece of legislation is of no relevance to any contractor who chooses to use us as their payment solution.