On August 29, 2007, HM Revenue & Customs announced that they wi shortly commence contacting those Service Company Providers whom they believe to be providers of Managed Service Companies and ask them to supply details of their accounting processes etc.

This action follows the guidance issued in July on the tests required to define a Managed Service Company (MSC) and a Managed Service Company Provider (MSCP)

The importance of the definitions is in the application of the debt transfer provisions that allow HMRC to recover unpaid PAYE and NIC from the service provider, or, in some cases, the Recruitment Business or other intermediary.

In summary, the guidance explains that for the MSC rules to apply, there must be an MSC Provider (as defined) and the MSC Provider must be “involved” in the MSC. Five tests are then prescribed and if any one of those tests is satisfied the MSC rules will apply. It is not the intention of this article to look in detail at those tests, which have been well documented elsewhere, but to consider how various suppliers have positioned themselves since those notes have been published and what decisions contractors and Recruitment Businesses should now be taking.

The announcement on August 29, 2007 made it clear that the MSC rules are not intended to remove the provision of personal services through personal service companies where a contractor is genuinely in business on their own account and that Recruitment Business should take a balanced view as to the type of service that may be most appropriate.

For many business that will revolve around the Umbrella v Personal Service Company debate.

Umbrellas
A number of firms offer an Umbrella service to contractors (either as a sole service or as an option to other solutions). There should be little or no risk attached to payments made from an Umbrella company provided that the expense rules are properly applied although there are a number of pitfalls in connection with the payment of travelling expenses that need to be avoided. At present, Umbrella companies can still benefit from certain advantageous travel rules and neither the MSC rules nor the IR35 rules apply to an Umbrella company so it is a relatively straightforward option.

Some Recruitment Businesses have re-drawn their Preferred Supplier Lists to include mainly or solely Umbrella organisations and where there is a risk that the MSC legislation may apply and/or if the contractor is not in business on his or her own account, or does not want the hassle of running their own limited company, the Umbrella option may be the most sensible one.

Personal Service Companies
On the other hand, the Umbrella solution may not be the best or most tax effective way for a contractor to provide their services where they are genuinely in business on their own account. In a number of sectors, contractors have traditionally organised their business affairs through a personal service company and paid themselves partly in dividends.

This is still likely to be the most tax effective method for someone in this position, and Recruitment Businesses may be doing their clients a dis-service if they only recommend an Umbrella option.

A person running their own limited company will need accountancy assistance at some stage, as well as an IR35 review to ensure that they are working outside of the IR35 legislation, and this is where care needs to be taken to ensure that they use a provider who does not fall within the MSC rules. HMRC guidance confirms that:
“A firm of accountants carrying on a business of being accountants will not be an MSCP (irrespective of the percentage of the client base which is individuals operating through service companies).”

Unfortunately, the contractor looking for the right level of assistance, or the Recruitment Business looking to set up an appropriate Preferred Supplier List will often not be in a position to know whether the Supplier is an MSCP or not. This is where, in time, the current enquiries being conducted by H M Revenue & Customs may provide some indication although the prospect of an HMRC “Kite Mark” is unlikely!

In the meantime, some accountancy firms have already approached HM Revenue & Customs for confirmation that their procedures do not place them within the MSC rules and have received such assurance. Other suppliers are engaging the Big4 accountancy firms to audit their processes and advise on the likelihood of the legislation applying and, for the present at least, Recruitment Businesses may consider working in partnership with those firms that have already received such approval.

John Hill
Proprietor – John Hill & Associates - www.johnhillassociates.co.uk
IR35 & Employment tax Specialists

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Susie Hughes
The Editor © AgencyEye 2007